One of the goals of the Paris Agreement is to making financial flows consistent with pathways towards low greenhouse gas emissions and climate resilient development, as stated in the Article 2.1c of the Paris Agreement. For a country like Indonesia, although it placed among the G20 countries, but financing the transition remains a big challenge for Indonesia. Learning from the Just Energy Transition Partnership (JETP) Indonesia that was agreed in 2022, even though all the committed finances are fully mobilized, Indonesia still needs to make funding available up to USD 77 billion. The figure does not include the social economy impacts that are caused by the transition, as well as the Indonesia’s financial needs to repay the loans provided through the partnership. Recalling the insufficient state budget of Indonesia to fully finance the transition, Indonesia then needs to mobilize other domestic sources to finance the gap. Financial sector plays an important role to mobilize the domestic sources accordingly, to which Indonesia needs to look further into it.
In that context, Indonesia Research Institute for Decarbonization (IRID) in collaboration with the Financial Sector Policy Center of the Fiscal Policy Agency, Ministry of Finance, held a discussion on ‘The Role of the Financial Sector in Financing Climate Action to align with the Paris Agreement’. The discussion was held on 22 August 2024 aimed at gathering more information on how the financial sector in Indonesia can play a role in mobilizing domestic sources to finance climate actions in Indonesia.
Some of the key findings from the discussion are the following:
A. Financing climate action at the sub-national level
Though playing a crucial role in implementing climate actions, the sub-national level – both at the provincial and city levels – face significant financial limitations, particularly those with minimal local revenue (Pendapatan Asli Daerah or PAD). Consequently, to finance their needs for climate actions, they often rely on regional debt which increases along with time as it does not accompanied by its increasing capacity to pay. This situation raises questions about the roles of local development banks, including through its Corporate Social Responsibility (CSR), as well as the availability of other financial instruments, in supporting the sub-national level to implement the required climate actions.
Another challenge that is faced at the sub-national level is on the access required for the funding. To be able to access funding from financial institutions, feasibility studies are mandatory. However, to develop a proper and sufficient feasibility study requires a funding that is often not available at the sub-national level. Having said that, the discussion recommended to have a synergy between Regional-Owned Enterprises (BUMD), State-Owned Enterprises (BUMN), and the private sector, in this case the financial sector.
B. Indonesia’s existing regulations and policies on sustainable finance
Indonesia already developed regulations and policies related to sustainable finance that might be used to finance climate actions. Several of the regulations and policies are:
- The Central Bank of Indonesia (BI) has issued green loan-to-value (LTV) ratio of 100% for green home-ownership financing, among others. Aside from that, a macroprudential liquidity incentive policy to encourage intermediation to support sustainable economic growth, was also issued
- The Central Bank of Indonesia (BI) in coordination with Indonesia Financial Services Authority have mandated the commercial banks to maintain a micro-funding portfolio of 30%, which can be accessed for financing small-scale renewable energy projects
- Indonesia Financial Services Authority (OJK) has issued the Indonesian Taxonomy for Sustainable Finance Edition 1.0 that serves as a guide to improve capital allocation and sustainable financing to support Indonesia’s climate action and sustainable development. Up to this point of discussion, the Edition 2.0 is currently being developed.
In accordance with the Law Number 4 of 2023 concerning the implementation of sustainable finance, Ministry of Finance, Bank Indonesia, and Indonesia Financial Services Authority are currently drafting a Government Regulation concerning the Sustainable Finance Committee. The Sustainable Finance Committee is expected to foster synergy among regulators to establish a comprehensive sustainable finance roadmap.
C. Other related issues
As a highly regulated sector, the financial sector welcomes the various policies issued by the government to support sustainable finance. However, a comprehensive set of policies that address all issues from upstream to downstream, will be very us.
