A sustainable financial-sector roadmap for Indonesia must aggressively incorporate rigorous environmental and social standards into the credit-risk framework.
That’s one of the core takeaways from a recent symposium sponsored by the Financial Services Authority (OJK), which is Indonesia’s chief finance-sector regulator, and the International Finance Corporation (IFC), the private-sector finance arm of the World Bank. While participants at the Bali event lauded Indonesia’s four-part initiative to adopt standards to support the “four Ps:”—pro-growth, pro-jobs, pro-poor, and pro-environment—it includes directives aimed at encouraging the transition to a low-carbon economy.
The first step in establishing how reach a destination, of course, is to know where you’re going. On this point, the OJK and the IFC agree: Indonesia’s best interests will be served by an energy economy that will meet the country’s climate change pledges, provide a pathway to more sustainable economic growth, and build the Indonesian banking sector’s project-finance capabilities.
The first step in establishing how reach a destination, of course, is to know where you’re going. On this point, the OJK and the IFC agree: Indonesia’s best interests will be served by an energy economy that will meet the country’s climate change pledges, provide a pathway to more sustainable economic growth, and build the Indonesian banking sector’s project-finance capabilities.
The Indonesian government has reiterated its commitment to reduce greenhouse gas emissions by 29 percent from business-as-usual (BAU) projections by 2030—and by 41 percent if it receives international support for this transition. The bulk of these greenhouse-gas reductions would come from forestry- and peatland-mitigating measures that would include significant reforestation initiatives and would account for about 88 percent of emission-reduction commitments. Only 5 percent would come from changes in the energy and transportation sectors.
This plan, on its face, is less than ambitious than it sounds.
According to the think tank WRI Indonesia, which has developed the Indonesia Climate Data Explorer, a tool that tracks emissions, energy-sector pollutions is on the rise today in at least 10 of the country’s 34 provinces. They include East Java, West Java, Central Java, South Sulawesi, Banten, DI Yogyakarta, the Riau Islands, North Sulawesi, Maluku and the capital province, DKI Jakarta.
If Indonesia were to adopt a proportional response to the broader economic threat posed by carbon-intensive sectors, it would be aiming now to transform its energy mix and diversify away from coal dependence.
To its credit, the Indonesian government seeks to derive 23 percent of its energy mix from renewable sources by 2025, a sizeable increase from the current percentage, which is in the low teens and comes mostly from hydro and geothermal. It cannot get there, however, unless it moves more assertively.
Here are three ways by which Indonesia can hasten its energy transition:
All in all, banks—domestic and foreign—play a critical role in supporting Indonesia’s drive to achieve universal electrification, and will be instrumental in directing capital toward lower-emission, affordable and accessible forms of power generation.
By increasing their capabilities in robustly assessing risk, domestic banks, especially, can cultivate new business in financing independent power projects. Such inclusion will translate into less foreign-exchange risk for Indonesia by reducing its dependence on financing through long-tenor loans denominated in U.S. dollars—and will help hasten sustainable economic growth.
Yulanda Chung is a Southeast Asia-based IEEFA energy finance consultant.