Climate change has recently become a worldwide hot topic as it threatens the survival of all species. Indonesia has shown its commitment to reducing CO2 carbon emissions through the ratification of the Paris Agreement. In practice, environment management requires substantial funding to fulfil all project expenses. Green finance can be a solution to overcome funding issues and also promote sustainable development. At the same time, green finance also affects the Indonesian financial sector because it can motivate investors to put their funds in this new instrument. The availability of new tools offers investors a range of options and ought to yield favorable returns.
Indonesia has several challenges in promoting green finance to foster financial development, such as the lack of interest in green finance. The public has limited information regarding the guidelines for implementing green finance, so the awareness of using green finance instruments is relatively low. Based on the ADB survey, it is known that around 61% of Indonesian investors are interested in green bonds, but they have limited awareness and resources. The lack of interest in green finance is also supported by issuers who are not interested in green bond issuance. Green finance instruments are relatively limited, resulting in a lack of product variety. Indonesia uses green financial instruments in the form of green bonds, sustainability bonds, green loans, and viability gap funding. Diversifying green finance products is an important aspect of attracting investors’ interest. The financing was dominated by non-renewable energy rather than renewable energy. This was demonstrated by Indonesia’s 4th rank for contribution to global coal lending 2021 – 2023 and coal financing by commercial banks, which increased by 42% from 2016 to 2023.
Some parties provide financial support for non-renewable energy because it provides certainty of profit. Energy transmission in Indonesia has begun using renewable energy, but the total energy supply does not compete with non-renewable energy. It requires a readjustment of some policies to overcome all the challenges.
Several regulations from the Financial Services Authority (OJK) and the Ministry of Energy and Mineral Resources (ESDM) have supported the implementation of green finance in Indonesia. However, this support is insufficient, requiring another initiative to complement them. Some solutions can be implemented to develop green finance in Indonesia. First, the government should use inclusive green finance as a guideline in the development of green
finance. The provision of clear information can influence investor and issuer interest in green finance. Second, the government should provide incentives and increase the number of credible green project developers to create a green finance ecosystem that can attract investors. Increasing funds from investment are used to overcome limited funds in the development of green finance. Third, the government should use blended finance to realize more green projects. Indonesia is a member of the G20 Global Blended Finance Alliance (GBFA), which can be utilized to optimize its blended finance framework and as a solution to secure financing in the green sector. Fourth, the government should develop green securitization as another alternative green financial instruments. Securitization programs provide cost, liquidity, and business scale benefits. Fifth, the government should offer risk guarantees to reduce greenwashing. It should help reassure investors that implementation aligns with the green finance plan and framework. Indonesia can optimize the Indonesia Infrastructure Guarantee Fund (IIGF) to provide guarantees for green projects. Sixth, the government should increase the adoption of renewable energy such as the use of rooftop solar power plants, electric vehicles, and the battery industry. All initiatives are being conducted to create successful green finance in Indonesia and have a great impact on the economy and the environment.
Download Full Paper Here: Policy Paper 8_Leveraging The Potential of Green Financing