Expected Results of Sustainable Finance In Indonesia: Is it as expected?

Sustainable finance is a resilient financial model that presents to support the global sustainable development agenda by integrating ESG (Environment, Social and Governance) in the practice. This model comes as an alternative in the midst of growing concern over climate change and human-caused destruction that could endanger the environment to the more severe extent in the near future should there is not any immediate initiative to be taken in action. The realisation emerges from how business actors, mostly investors, rely on environment to sustain their own business considering natural capital is a key driver of economic growth. However, there are still many investors who're inclined towards only gaining profit while ignoring the condition and continuity of environment that they use as a medium to keep their business on track. In order to tackle this issue, international institutions such as the UN (United Nations) and IFC (International Finance Corporation) encourage many countries to introduce and even better implement the concept of sustainable financing in their respective countries. The countries are later expected to communicate this issue with the central bank and as well as commercial banks since the later also participate in offering loans to the investors who are planning to build and do business in certain areas in the countries. Not only do the banks are required to guide the investors in terms of offering loans, they are also expected to encourage investors to implement the business practices that will also contribute in conserving the environment. Amongst the list of countries affected by the issue, Indonesia is determined to adopt and implement this financial model as it is seen to be aligning with their commitment to reduce the gas emission by 2020 at the Pittsburgh Summit in 2009.

(1) Indonesia as one of the G20 countries was already advised to promote sustainable financing as an alternative other than the conventional model that tends to feign ignorance towards the environmental sustainability. Moreover, Indonesia's commitment of cutting greenhouse gas emission by 26% independently and 41% with international support has been realised into the National Action Plan on Reducing Greenhouse Gas Emission, or RAN-GRK (Rencana Aksi Nasional-Gerakan Rumah Kaca) in Indonesia. (2)ii Corresponding to the commitment and also the need to implement sustainable financial model, Financial Services Authority or known as OJK (Otoritas Jasa Keuangan) in Indonesia released a "Roadmap for Sustainable Finance in Indonesia 2015-2019" by the end of 2014. Through the roadmap, OJK hope a lot more people in Indonesia will become familiar with the concept of sustainable financing, as it still has not been widely known. For Indonesia, sustainable finance is defined as comprehensive support from the financial service industry to achieve sustainable development resulted from harmonious relationship between economic, social and environmental interests.(3)iii The roadmap starts by introducing the framework, including background and objectives that founded the roadmap. Like any other countries, Indonesia also shares the same base of understanding of how development initiatives and economic activities tend to orientate towards achieving profit growth instead of putting environment as another key aspect into consideration. The negative impacts brought by the conventional economic model which solely focuses on gaining profit and expanding the economic scope, prompted the move to adopt the sustainable finance model which balances environmental and social aspects. Therefore, within the roadmap, OJK state that sustainable development is no longer an option, but an imperative. The statement later becomes the foundation of three main objectives as to why Indonesia is in need to implement sustainable finance model: (a) To improve the resilience and competitiveness of Financial Service Institution, or LJK (Lembaga Jasa Keuangan) in Indonesia, in order to enable them to grow and develop in a sustainable manner, (b) To provide financing resources required by the public by using the pro-growth, pro-job, pro-poor and pro-environment Long Term Development Plan and Medium Term Development Plan, or RPJM (Rencana Pembangunan Jangka Menengah) and RPJP (Rencana Pembangunan Jangka Panjang) in Indonesia, as point of reference, and (c) To contribute to the national commitment in addressing the global warming challenge by carrying out climate change mitigation and adaptation in business activities towards a competitive low carbon economy.

Despite the released roadmap and as well as many other rules and policies that are implemented in order to make sustainable finance overall possible in Indonesia, the concept of sustainable finance has not been widely known both in societal aspect and in the wider scope of business world. The insufficient understanding of sustainable finance in Indonesia can also be seen and determined from the low number of academic journals and conferences in Indonesia that specifically discuss the concept of sustainable finance.(4)iv While it is already known that majority of banks consider green finance as a promising business area, in contrast to 12 banks which expressed no interest at all, only six banks consider green finance a "very promising" business area. (5) Also, while there are already major banks that views green finance as a promising business area, there are still other banks that still want to revel in as much marginal profit as possible which then makes them think that green finance is not a priority or even obligation to them. Even though the characteristics of Indonesia's financial markets do affect the way sustainable finance model is being implemented, considering how there is still inadequate capacity and experience regarding ESG risk analysis, it is worth noting that green investments are also being held back by difficult investment conditions, inconsistent policies and complex permission procedures. (6) These obstacles are mostly experienced by foreign investors with considerably ample liquidity who wish and show strong interest to do business in Indonesia, which then diminishes the huge potential for investment in sustainable finance sectors, such as renewable energy. Regardless, it still can be said that the condition seems to be increasing ever since the roadmap has been released, especially there are in total of seven national banks that are associated as First Movers on Sustainable Banking and have also committed to implement sustainable finance model throughout their business activities. However, the positive feedback is said to have not yet reached the satisfaction that was initially expected. There are still indications which signifies gaps in several fronts, such as a more specific and practical guidance to assist financial institutions with managing specific ESG risks of their activities, including clearer tools and methodologies that would help to encourage and smoothen the flow of green finance. (7)vii In addition, OJK is expected to develop further internal capabilities and define the appropriate metrics to properly measure the level of implementation, and as well as effectively introducing fiscal and non-fiscal incentives to encourage financial institutions to implement the sustainable finance/green finance policy.(8)viii Indonesia might face a long road ahead to be able to completely implement the sustainable finance model in the economic and financial activities, but instead of treating it as a hindrance, we should see it as an opportunity to become a pioneer, at least, in the ASEAN region, in adopting and implementing the sustainable finance model.

Writer: Sarah Adhitya

----Resilience Development Initiative is a think-tank currently working to develop a robust database on the topic of sustainable finance and actively seeking opportunities of research. Research will be aimed to fill in the gaps available which have impeded the implementation of successful sustainable finance in Indonesia. As we see that the issue surrounding sustainable financing will be more prominent in the near future, we see that research; e.g. on the available barriers and Indonesia's existing institutional capacity to implement the sustainable finance model will be highly valuable for Indonesia.

References:

1. OJK (Otoritas Jasa Keuangan). Roadmap Keuangan Berkelanjutan di Indonesia 2015-2019. https://www.ojk.go.id/Files/box/keuangan-berkelanjutan/roadmap-keuangan-berkelanjutan.pdf

2. Ibid.

3. Definition of Sustainable Finance in Indonesia, 2014, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, Regional Economic Development Program (RED)

4. Naufal D. Adam and Desi Adhariani. Sustainable finance for sustainability: a case study analysis. https://www.researchgate.net/publication/329604585_Sustainable_finance_for_sustainability_a_case_study_analysis

5. ASrIA (The Association for Sustainable and Responsible Investment in Asia) and IFC (International Finance Corporation). Towards a Sustainable Financial System in Indonesia. https://www.ojk.go.id/sustainable-finance/id/publikasi/riset-dan statistik/Documents/Towards_a_Sustainable_Financial_System_in_Indonesia(1).pdf 

6. Ibid.

7. Sustainable Banking Network (SBN) and International Finance Corporation. Country Progress Report Addendum to SBN Global Progress Report – Indonesia. http://documents.worldbank.org/curated/en/272141520947755795/pdf/124241-WP-ID-SBN-Country-Progress-Report-Indonesia-PUBLIC.pdf

8. Ibid.