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, financing climate transitions remains a big challenge. 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, mobilizing other domestic sources becomes crucial to finance the gap. Financial sector plays an important role to mobilize the domestic sources accordingly, which Indonesia needs to delve further into.
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 Transitions 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 transitions 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 – faces significant financial challenges, particularly those with minimal local revenue (Pendapatan Asli Daerah or PAD), as they do not have sufficient fiscal space. Consequently, to finance their needs for climate actions, they often rely on regional debt which increases along with time as it does not follow by its capacity to pay. This leads into a discussion about the roles of local development banks, including through its Corporate Social Responsibility (CSR), as well as the availability of other financial instruments, to support 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 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 may lead to climate actions financing. Several of the existing 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 1.0 that serves as a guide to improve capital allocation and sustainable financing to support Indonesia’s climate action and sustainable development. When the discussion was held, the process to develop the updated version has started and still on going to date.
In accordance with the Law Number 4 of 2023 concerning the implementation of sustainable finance, Ministry of Finance, Central Bank of 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 contribute significantly in enabling financial sector to finance climate transitions actions.
Notes: The full version of the discussion paper is only available in Bahasa Indonesia.
