.             Towards  a  Sustainable    Financial  System  in  Indonesia       The  UNEP  Inquiry  Into  the  Design  of  a  Sustainable   Financial  System       In  partnership  with     The  Association  for  Sustainable  and  Responsible   Investment  in  Asia  (ASrIA)     and  the       International  Finance  Corporation     Inter     April  2015             The  partners     The  Inquiry  into  the  Design  of  a  Sustainable  Financial  System  has  been  initiated  by  the  United  Nations  Environment   Programme  to  advance  policy  options  to  improve  the  financial  system’s  effectiveness  in  mobilizing  capital  towards   sustainable  development.  www.unep.org/inquiry   International  Finance  Corporation  (IFC),  a  m ember  of  the  World  Bank  Group,  is  the  largest  global  development   institution  focused  exclusively  on  the  private  sector  in  developing  countries.  It  uses  its  investment  and  advisory  services   in  more  than  a  100  developing  countries  to  support  companies  and  financial  institutions  in  emerging  markets  to  create   jobs,  generate  tax  revenues,  improve  corporate  governance  and  environmental  performance,  and  contribute  to  their   local  communities.  www.ifc.org   The  Association  for  Sustainable  &  Responsible  Investment  in  Asia  (AsRIA)  is  the  leading  organization  in  Asia  dedicated  to   promoting  sustainable  finance  and  investment  across  the  region.  ASrIA  aims  to  play  a  significant  role  as  a  thought  leader,   advocate  and  convener  in  facilitating  Asia’s  transformation  to  a  sustainable  future.    www.asria.org   The  Partners  would  like  to  o ffer  their  thanks  to  the  Indonesia  Financial  Services  Authority  Otoritas  Jasa  Keuangan  (OJK)  for   its  inputs  to  the  report  and  to  its  leadership  in  convening  key  actors  to  take  forward  the  sustainable  finance  agenda  in   Indonesia  in  the  context  also  of  this  report  and  the  wider  work  of  the  Partners.  www.ojk.go.id     About  this  report   This  report  has  been  developed  by  the  UNEP  Inquiry,  in  partnership  with  the  IFC  and  AsRIA.  Its  aim  is  to  support  both   domestic  policy  making  and  international  understanding  and  knowledge.  The  research  was  carried  out  through  a  desk   review  of  literature  and  data  and  a  series  of  interviews  carried  out  in  Jakarta  between  October  2014  and  January  2015.  An   earlier  version  was  presented  at  a  workshop  in  Jakarta  in  February  2015.       It  is  part  of  a  wider  set  of  regional  and  country  reports  being  produced  as  part  of  the  UNEP  Inquiry  (including  Bangladesh,   Brazil,  China,  Colombia,  India,  Indonesia,  Kenya,  South  Africa,  Uganda,  the  UK  and  the  US;  the  Colombia  and  Kenya   reports  are  also  being  developed  with  the  IFC).   Comments  are  welcome  and  should  be  sent  to  simon.zadek@unep.org     Project  lead:  Simon  Zadek,  UNEP  Inquiry   Project  partner  leads:  Aditi  Maheshwari  (IFC)  and  Jessica  Robinson  (AsRIA).   Author:  Ulrich  Volz,  SOAS,  University  of  London  &  German  Development  Institute   With  support  from:  Abinanto,  Maya  Forstater,  Lydia  Guett,  Andrea  Liesen  and  Jessica  Robinson.     Acknowledgements   We   are   grateful   to   many   people   who   provided   inputs   to   this   report.   In   particular,   Pak   Edi   Setiawan   and   the   team   from   OJK   provided   inputs   into   the   report   and   hosted   a   convening   in   Jakarta   on   February   17,   2015,   where   many   insightful   comments   were   received.  We  would  also  like  to  mention  and   thank   Andre   Barlian,   Frank  Bertelmann,  Volker   Bromund,   Wahyuningsih   Darajati,   Ismid   Hadad,   Poltak   Hotradero,   Elwin   Karyadi,   Edgare   Kerkwijk,   Fumito   Kotani,   Nur   Hasan   Kurniawan,  Kit  Nicholson,  Julian  Noor,  Oliver  Oehms,  Jochen  Saleth,  Priyo  Santoso,  M.S.  Sembiring,  Haruhiko  Takamoto,   Denny   Rizal   Thaher,  Jackrit   Watanatada,   and  Edhi  S.  Widjojo  for   insightful   discussions   or   feedback   on   draft   versions   of   this  report.   The  Inquiry’s  work  in  Indonesia  has  been  supported  by  the  UK  Department  for  International  Development  (DFID),  while           the  work  of  the  IFC  and  AsRIA  on  this  project  is  kindly  supported  by  the  German  Federal  Government’s  Gesellschaft  für   Internationale  Zusammenarbeit  (GIZ).         Disclaimer:  The  designations  employed   and  the  presentation  of  the  material  in  this  publication  do  not   imply  the  expression  of  any  opinion   whatsoever     on   the   part   of   the  United   Nations   Environment   Programme   concerning   the   legal   status   of   any   country,   territory,  city   or   area   or  of  its  authorities,  or  concerning  delimitation  of  its  frontiers  or  boundaries.  Moreover,  the  views  expressed  do  not  necessarily  represent   the   decision   or   the   stated   policy   of   the   United   Nations   Environment   Programme,   nor  does   citing   of   trade   names   or  commercial   processes   constitute   endorsement.:   The   conclusions   and   judgments   contained   in   this   report   should   not   be   attributed   to,   and   do   not   necessarily   represent   the   views   of,   IFC   or   its   Board   of   Directors   or  the   World   Bank   or   its   Executive   Directors,   or   the   countries  they   represent.   IFC   and   the  World  Bank   do  not  guarantee  the  accuracy  of  the  data   in  this   publication   and  accept  no  responsibility   for  any  consequences   of   their   use   Contents    SUMMARY   4   1   INTRODUCTION   5   1.1   THIS  STUDY   5   2   FINANCING  FOR  SUSTAINABLE  DEVELOPMENT  IN  INDONESIA   7   1.1   INVESTMENT  NEEDS   8   2.1   PUBLIC  FUNDING  AVAILABILITY   10   2.2   FOREIGN  DIRECT  INVESTMENT   11   3   INDONESIA’S  FINANCIAL  SYSTEM   13   3.1   FINANCIAL  REGULATORY  AUTHORITIES,  PUBLIC  AUTHORITIES  AND  INDUSTRY  BODIES   13   3.2   SOURCES  AND  CHANNELS  FOR  CAPITAL  ALLOCATION   14   3.3   FLOWS  OF  GREEN  FINANCE   19   3.4   POLICIES  TO  PROMOTE  SUSTAINABLE  FINANCE   22   3.5   OJK’S  ROADMAP  FOR  SUSTAINABLE  FINANCE   24   3.6   BARRIERS  TO  SUSTAINABLE  FINANCE  IN  INDONESIA  AND  RECENT  DEVELOPMENTS   26   4   CONCLUSIONS   35   BIBLIOGRAPHY   38   ANNEX  1:  PROPOSAL  FOR  GREEN  BANKING  FRAMEWORK   42   ANNEX  2:  ROADMAP  IMPLEMENTATION  PLAN   43   ANNEX  3:  IIF’S  8  SOCIAL  ENVIRONMENT  PRINCIPLES   45   ANNEX  4:  SRI  KEHATI  INDEX   46   ABOUT  THE  PARTNERS   47         UNEP  Inquiry/  IFC/  AsRIA   3   Sustainable  Financing  in  Indonesia         Summary   Placing   Indonesia’s   economy   onto   a   green   and   sustainable   development   pathway,   as   envisaged   in   the   National   Long   Term   Development   Plan,   will   require   a   large   mobilization   of   investment.   Estimates   of   the   annual   investment   needed   are   in   the   order   of   US$300-­‐530   billion,   with   a   large   portion   of   this   investment   needed   in   critical   infrastructure,   as   well   as   environmentally   sensitive   areas   such   as   agriculture,   forestry,   energy,   mining   and   waste.   In   addition,   financing   for   SMEs   and   industry   is   critical   for   creating   jobs   and   boosting  productivity.   Funds   for   this   investment   will   need   to   come   from   both   the   private   and   public   sectors,   including   both   domestic  and  international  sources.  Addressing  ‘real  economy’  barriers,  such  as  fossil  fuel  subsidies  and  gaps   in   enforcement   of   environmental   regulation,   is   critical   to   mobilising   green   investment.   However,   such   policies   are   not   the   only   tools   for   influencing   investment.   Policy   makers   around   the   world   are   increasingly   recognizing   that   weaknesses   and   failures   within   the   financial   system   may   be   constraining   its   ability   to   respond  to  risks  and  opportunities  for  viable,  resilient  investments.     Indonesia’s   financial   system   is   dominated   by   banking,   which   accounts   for   79.8%   of   total   assets,   compared   to   10.5%   of   assets   held   by   insurers,   2.6%   by   pension   funds   and   6.4%   by   finance   companies.   There   are   already   some   flows   of   private   green   investment—for   example,   a   review   by   Bank   Indonesia   of   green   financing   by   banks   found   that   green   investment   in   May   2013   was   about   US$1   billion,   which   is   already   equivalent   to   a   significant   portion   of   the   public   budgets   allocated   to   green   relevant   line   ministries.   According   to   the   2014   Asia  Sustainability  Investment  Review,  sustainable  investments  in  Indonesia’s  capital  markets  reached  US$1.14   billion  at  the  end  of  2013.     Today,   the   majority   of   banks,   as   well   as   non-­‐bank-­‐financial   institutions   do   not   consider   environmental,   social   and  governance  factors  in  their  lending  or  investment  process  as  a  main  consideration.  While  climate  change   is  seen  as  a  threat  to  Indonesia’s  long-­‐term  economic  development,  lending  and  investment  horizons  remain   short-­‐term.   However,   Indonesia’s   financial   markets   have   seen   a   number   of   important   design   innovations   over   the   past   years   aimed   at   encouraging   green   lending   and   investment,   such   as   the   development   of   sustainability  ratings  in  its  rapidly  growing  stock  market,  the  SRI-­‐KEHATI  index  and  the  recent  launch  of  the   SRI  KEHATI-­‐ETF.  While  these  are  innovations  that  mirror  developments  in  OECD  countries,  they  are  almost   unique  for  a  developing  country.   Furthermore,   the   Indonesian   Government   has   begun   to   take   steps   to   green   some   aspects   of   the   financial   system.   In   December   2014,   OJK,   the   financial   services   regulator,   launched   a   Roadmap   for   Sustainable   Finance   in  Indonesia,  which  lays  down  a  comprehensive  work  plan  for  promoting  sustainable  finance  for  the  period   2015-­‐2019.  The  Roadmap  will  constitute  an  integral  part  of  OJK’s  Master  Plan  for  Indonesia’s  Financial  Sector.   Despite  being  at  an  early  stage,  the   Roadmap  is  unique  internationally  as  a  systematic  plan  grown  out  of  a   decade  of  development  of  sustainable  finance  in  Indonesia.   As  part  of  this  Roadmap  OJK  might  develop  a  binding  regulatory  framework  for  green  finance  which,  among   others,  could  include  the  establishment  of  compulsory  environmental  and  social  management  systems  and   associated  reporting  in  both  banking  and  capital  markets.   Given  that  Indonesia  is  the  country  with  the  world’s  largest  Muslim  population,  the  development  potential   for   Islamic   finance   is   vast.   OJK   might   therefore   foster   the   development   of   Islamic   finance   as   a   means   of   aligning  the  Indonesian  financial  system  with  sustainable  development.   UNEP  Inquiry/  IFC/  AsRIA   4   Sustainable  Financing  in  Indonesia       1   Introduction   To   place   the   economy   onto   a   sustainable   development   pathway   requires   an   unprecedented   shift   in   investment;   away   from   greenhouse   gas   (GHG),   fossil   fuel   and   natural   resource   intensive   industries   and   toward   more   resource   efficient   technologies   and   business   models.   These   shifts   must   be   part   of   an   even   larger  mobilization  of  the  finance  needed  to  enable  broad  and  equitable  economic  growth,  through  resilient   energy  systems,  cities,  agriculture,  transport,  water,  healthcare  and  education.   This  is  true  both  globally  and  in  Indonesia.  Funds  for  this  investment  will  need  to  come  from  both  the  private   and  public  sectors,  including  both  domestic  and  international  sources.   Weak   and   uncertain   ‘real   economy’   policies   are   often   identified   as   barriers   holding   back   sustainable   investment.   Countries   with   more   transparent,   coordinated   long-­‐term   and   credible   policies   capture   more   investment   and   build   new   industries,   technologies   and   jobs   while   reducing   emissions   faster   and   more   efficiently   than   countries   with   weak   and   disjointed   policies   (Deutsche   Bank   2010).   In   particular,   a   lack   of   strong   carbon   prices,   fossil   fuel   subsidies   and   weakly   enforced   environmental   regulations   are   often   highlighted  as  the  cause  of  underinvestment  in  the  green  economy.  This  is  true  also  in  Indonesia,  where  real-­‐ economy   reforms   to   electricity   and   fuel   subsidies,   fiscal   and   regulatory   policies   to   promote   green   industries,   and   strengthened   environmental   protection   have   been   identified   as   key   priorities   for   transforming   the   economy  toward  green  prosperity,  in  support  of  national  medium  and  long-­‐term  development  plans  (UNEP   2011).   More   generally,   improvements   to   the   overall   investment   climate,   including   factors   such   as   ease   of   doing  business  and  the  enforcement  of  property  rights,  will  be  also  key  to  fostering  investment.   However,   such   ‘real   economy’   policies   are   not   the   only   tools   that   policy   makers   have   for   influencing   investment   flows.   Policy   makers   around   the   world   are   increasingly   recognizing   that   weaknesses   and   failures   within   the   financial   system   itself   may   be   constraining   its   ability   to   respond   to   risks   and   opportunities   for   viable,  resilient  investments  (see  box  on  page  2).  Central  banks  and  financial  regulators  from  Bangladesh  to   Brazil  and  from  China  to  South  Africa  are  experimenting  with  ways  of  explicitly  incorporating  sustainability   considerations   into   rules   governing   financial   markets   (UNEP   Inquiry   2014a,   2014b).   Financial   market   standard-­‐setters,   including   credit   rating   agencies   such   as   S&P,   are   advancing   standards   that   increasingly   factor  in  environmental  risk  (S&P  2014).   1.1 This  Study   To   date,   there   is   still   limited   understanding   of   the   broad   landscape   of   private   green   finance   in   Indonesia.   While   some   research   has   been   conducted   on   sustainable   financing   in   the   banking   sector,   there   has   been   relatively  little  systematic  research  into  the  specific  features  and  flows  of  green  finance  from  private  capital   markets,  even  though  Indonesia  has  reasonably  sophisticated  financial  institutions  and  markets.1   This   study   is   therefore   intended   to   contribute   to   the   exploration   of   the   state   of   green   investment   in   Indonesia  within  the  wider  economic  and  financial  sector  context.  Its  aims  are:   ¥ To  examine  how  and  to  what  extent  different  types  of  investors  and  lenders  currently  finance  green   investments  in  Indonesia  in  order  to  better  understand  the  drivers  and  subsequent  impacts  on   capital  flows.   ¥ To  identify  and  analyse  gaps  in  financing,  regulatory  barriers  and  potential  financial  policy   innovations  in  order  to  increase  green  finance  in  Indonesia.   ¥ To  enhance  the  dialogue  on  increasing  the  flow  of  green  finance  to  steer  the  transition  to  a  low   carbon  economy  in  Indonesia  and  coordinate  closely  with  related  initiatives.   ¥ To  contribute  to  growing  international  experience  on  aligning  financial  systems  to  sustainable   development.                                                                                                                                           1  In  2012,  PWC  and  IFC  (2012)  carried  out  a  survey  in  the  Indonesian  financial  sector  as  part  of  a  larger  study  on  environmental  and  social  risk   management  in  the  East  Asia  and  Pacific  region.  In  2013,  Bank  Indonesia  and  the  German  Development  Institute  conducted  a  green  finance   survey  in  the  Indonesian  banking  system  (Volz  et  al.  2015).   UNEP  Inquiry/  IFC/  AsRIA   5   Sustainable  Financing  in  Indonesia           International  Experience     Around   the   world,   investment   flows   are   failing   to   enable   balanced   growth,   spark   full   employment  and  allocate  capital  for  the  development  of  resilient  infrastructure.  Resources  are   still   being   over-­‐invested   in   inefficient,   environmentally   damaging   activities   and   under-­‐allocated   to   build   green,   efficient   and   inclusive   economies.   Many   countries   have   started   to   take   measures   to  promote  green  finance  and  to  address  the  problem  of  shortsighted  investment  horizons.    The   Asia-­‐Pacific  region  is  one  of  the  most  active  in  innovating  towards  a  sustainable  financial  system.   There  is  widespread  adoption  of  new  green  disclosure  requirements  across  banking  and  capital   markets.   Green   credit   guidelines   are   being   introduced   by   banking   regulators.   Sustainability   indexes  and  benchmarks  are  becoming  common  in  securities  markets,  and  credit  rating  agencies   are  incorporating  climate  risk  into  their  solvency  analysis.  Innovations  in  micro-­‐finance  including   mobile-­‐money  are  seeking  to  close  the  gaps  in  access  to  finance.     The   Central   Bank   of   Brazil   and   the   China   Banking   Regulatory   Commission   both   require   commercial   banks   to   establish   systems   for   environmental   and   social   risk   management.   The   EU   has   set   requirements   for   large   companies   to   disclose   information   on   their   environmental   and   social   policies.   The   Bank   of   England   is   assessing   the   vulnerability   of   insurance   companies   to   climate   related   risks.   Norway’s   sovereign   wealth   fund   will   give   more   consideration   to   climate   change   related   risks   in   its   investments.   The   Central   Bank   of   Bangladesh   requires   5%   of   bank   lending  to  be  for  clean  energy,  pollution  control  and  enhancement  of  energy  efficiency.  In  South   Africa,   regulatory   rules   require   that   enterprises   disclose   their   finance   and   sustainability   policies,   while   the   Securities   Commission   Malaysia   issued   rules   for   institutional   investors   making   an   explicit   requirement   that   they   include   corporate   governance   and   sustainable   development   into   the   investment   decisions.   The   Australian   Securities   Exchange   has   also   issued   the   new   requirements   for   governance   of   listed   companies,   requiring   that   the   listed   companies   shall   disclose   whether   they   are   facing   substantive   economic,   environmental   and   social   sustainability   risk  exposure  and  how  to  manage  these  risks.     Market  players  and  private  standard  setters  have  also  taken  a  number  of  positive  steps,  including   leading  credit  rating  agencies,2  stock  markets  and  institutional  investors.  US$45  trillion  in  assets   now   support   the   UN-­‐backed   Principles   for   Responsible   Investment,   and   US$24   trillion   supporting   the   2014   Global   Investor   Statement   on   climate   change.3  The   green   bond   market   is   developing   rapidly  with  an  estimated  US$500  billion+  of  bonds  already  linked  to  green  economy  and  climate   investment  themes.   While   these   policy   and   market   innovations   indicate   potential,   they   have   not   yet   reached   scale.   Industry  initiatives  may  be  held  back  by  institutional  inertia  and  require  policy  support  to  reach  a   critical   mass.   Country-­‐level   innovations   may   also   require   changes   to   international   policy   frameworks—such   as   the   Basel   rules   (Alexander   2014).   Many   policymakers   are   rightly   cautious   about   intervening   in   the   financial   system   to   achieve   real   economy   goals,   and   knowledge   about   what  could  work  is  still  at  an  early  stage.       Sources:  UNEP  Inquiry  (2014).  Aligning  Finance  to  Sustainable  Development:  Insights  from  Practice.  Geneva:  UNEP  and   UNEP  Inquiry  (2015).    Aligning  the  Financial  Systems  in  the  Asia  Pacific  Region  to  Sustainable  Development.  Geneva:  UNEP.                                                                                                                                               2  See,  for  example  discussion  in  S&P  (2014).   3  www.iigcc.org/publications/publication/2014-­‐global-­‐investor-­‐statement-­‐on-­‐climate-­‐change   UNEP  Inquiry/  IFC/  AsRIA   6   Sustainable  Financing  in  Indonesia       2 Financing  for  Sustainable  Development  in  Indonesia   Indonesia’s   National   Long-­‐Term   Development   Plan   for   the   period   2005   to   2025   (Rencana   Pembangunan   Jangka   Panjang   Nasional,   RPJPN   2005-­‐2025)   envisages   a   “green   and   ever-­‐lasting   Indonesia”.   One   of   the   RPJPN’s   eight   national   development   missions   is   the   realization   of   “a   greener   and   sustainable   Indonesia”.   It   recognizes   that   “the   long   term   sustainability   of   development   will   face   the   challenges   of   climate   change   and   global  warming  which  affect  activities  and  livelihood”   and  requires  the  Government  of  Indonesia  pursues  its   economic   growth   targets   in   accordance   with   socially   balanced,   resource-­‐efficient   and   environmentally   friendly  management.  This  is  part  of  a  vision  to  establish  a  country  that  is  developed  and  self-­‐reliant,  just  and   democratic,   and   peaceful   and   united.   Economic   development   is   aimed   at   achieving   efficient   and   modern   mining  and  agricultural  sectors,  a  globally  competitive  manufacturing  sector  and  productive  service  sector.   Social   objectives   include   reaching   a   level   of   income   per   capita   in   2025   of   approximately   US$6,000,   with   a   relatively  good  level  of  equity  and  less  than  5%  of  people  in  poverty.   At   the   2009   G20   Summit   in   Pittsburgh,   President   Yudhoyono   proclaimed   the   goal   of   reducing   Indonesia’s   GHG   emissions   by   26%   with   national   efforts   and   41%   with   international   financial   assistance   in   relation   to   a   business-­‐as-­‐usual   (BAU)   baseline   by   2020.   In   order   to   meet   the   government’s   ambitious   climate   goals,   a   National  Action  Plan  for  Green  House  Gas  Reduction  (Rencana  Aksi  Nasional  Penurunan  Emisi  Gas  Rumah  Kaca,   RAN-­‐GRK)   was   developed   by   the   National   Development   Planning   Agency   (BAPPENAS)   and   approved   by   President   Yudhoyono   in   September   2011.4  RAN-­‐GRK   has   the   objective   of   “the   implementation   of   various   activities   both   directly   and   indirectly   to   reduce   greenhouse   gas   emissions   in   accordance   with   the   national   development   targets”   (President   of   the   Republic   of   Indonesia   2011).   It   defines   five   priority   sectors   for   climate  change  mitigation  to  reach  the  26%  target  (Table  1).   Table  1:  RAN-­‐GRK  priority  sectors  and  envisaged  action   Environment   Public  works   Energy  and   Agriculture   Resources   Transport   Forestry   Industry   Action  planà  Implementing  ministries   Mineral     Forestry  and  peat  land:  Fire  control,  network  system                 management,  water  management,  land  rehabilitation,   plantations,  community  forest,  illegal  logging  eradication,   deforestation  prevention,  community  empowerment.   Agriculture:  Introduction  of  low-­‐emission  paddy  varieties,                 irrigation  water  efficiency,  organic  fertilizer  use.   Energy  and  transport:  Bio-­‐fuel  use,  fuel  efficiency                 standard,  Transportation  Demand  Management,  public   transport  and  roads,  demand  side  management,  energy   efficiency,  renewable  energy.   Industry:  Energy  efficiency,  use  of  renewable  energy,  etc.                 Waste:  Use  of  final  landfill,  waste  management  and  urban                 integrated  wastewater  management.   Source:  BAPPENAS  (2011:  8).                                                                                                                                           4  In   the   course   of   2015,   the   RAN-­‐GRK   estimates   of   finance   needs   will   be   expanded   to   2030   as   part   of   developing   Indonesia’s   Intended   Nationally  Determined  Contribution  for  the  UNFCCC  process.   UNEP  Inquiry/  IFC/  AsRIA   7   Sustainable  Financing  in  Indonesia       1.1 Investment  Needs   Under  the  National  Medium  Term  Development  Plan  for  the  period  2015-­‐2019  (Rencana  Pembangunan  Jangka   Menengah  Nasional,  RPJMN  2015-­‐2019)  annual  total  investments  needs  were  put  at  IDR3,945  trillion  (about   US$300  billion)  for  2015  and  are  set  to  increase  to  IDR6,947  trillion  (about  US$530  billion)  by  2019  in  order  to   raise  economic  growth  from  a  target  of  5.8%  in  2015  to  8.0%  in  2019  (President  of  the  Republic  of  Indonesia   2015).5  The  RPJMN  2015-­‐2019  sets  forth  a  sustainable  development  strategy  that  balances  social,  economic   and   environmental   development.   It   seeks   to   mainstream   sustainable   development   principles   across   all   development   sectors   to   maintain   the   sustainability   of   communities’   social   life,   economic   welfare   and   environmental   quality.   The   RPJMN   2015-­‐2019   demands   that   “development   activities   must   not   degrade   the   carrying  capacity  of  environment  and  the  balance  of  the  ecosystem”.   Taking   the   RPJMN   2015-­‐2019   estimates   as   a   yardstick   for   Indonesia’s   future   investment   needs,   annual   financing  in  the  order  of  US$300-­‐530  billion  will  be  needed.  A  large  share  of  this  will  need  to  go  into  critical   infrastructure,   as   well   as   environmentally   sensitive   areas   such   as   agriculture,   forestry,   energy,   mining   and   waste.  In  addition,  financing  for  micro,  small  and  medium  sized  enterprises  (MSMEs)  and  industry  is  critical   for   creating   jobs   and   boosting   productivity.   All   of   this   investment   will   need   to   be   sensitive   to   environmental   and   associated   policy   risks.   Funds   for   this   investment   will   need   to   come   from   both   the   private   and   public   sectors,  including  both  domestic  and  international  sources.   Looking  at  climate  change  specifically,  differing  estimates  of  the  investments  needed  to  reach  the  national   GHG   reduction   goals   were   released   by   BAPPENAS   (2010,   2011)   and   UNFCCC   (2009).   UNFCCC   (2009)   and   BAPPENAS  (2011),  in  its  RAN-­‐GRK  implementation  guide,  use  the  same  BAU-­‐scenarios  in  which  they  predict   2.95   Gigatonne   (Gt)   CO2   emissions   until   2020,   leading   to   estimated   mitigation   cost   in   the   order   of   US$8.9   billion   (Table   2).6  Based   on   these   estimates,   the   Indonesian   government   committed   itself   to   allocate   US$8.9   billion   from   different   sources   for   the   26%   goal   and   estimated   a   need   for   an   additional   US$17.96   billion   of   international   funding   in   order   to   reach   the   41%   target   (UNFCCC   2009).   For   the   Indonesian   Climate   Change   Sectoral  Roadmap  (ICCSR),  BAPPENAS  (2010)  assumed  a  much  higher  BAU-­‐scenario  with  18.72  GtCO2,  which   subsequently  yields  a  much  higher  estimated  mitigation  cost  of  approximately  US$69  billion.   In   Indonesia’s   First   Mitigation   Fiscal   Framework   (MFF),   the   Indonesian   Ministry   of   Finance  estimated   that   the   annual   cost   of   actions   in   forestry   and   peat   lands,   energy   and   transportation   sectors   required   to   reach   the   26%  emission  reduction  target  by  2020  would  be  between  IDR100  trillion  and  IDR140  trillion  (US$10.7  billion   and  US$15  billion  at  the  time)  (cf.  Table  3;  MOF  2012).  The  Ministry  assumed  that  between  one  and  two  thirds   of   the   cost   of   new   initiatives   would   be   financed   publicly,   including   fiscal   incentives   to   stimulate   private   investment.  Mitigation  cost  for  agriculture,  industry,  and  wastewater  were  not  considered  in  the  first  MFF.                                                                                                                                           5  Indonesia’s   National   Long-­‐Term   Development   Plans,   which   span   over   20   years,   are   broken   down   into   four   National   Medium-­‐Term   Development  Plans  with  five-­‐year  horizons  each.   6  See   also   the   estimates   of   the   National   Council   on   Climate   Change   (Dewan   Nasional   Perubahan   Iklim,   DNPI),   which   is   responsible   for   coordination  of  climate  change  policy  and  programmes  (cf.  DNPI  2009).   UNEP  Inquiry/  IFC/  AsRIA   8   Sustainable  Financing  in  Indonesia       Table  2:  Emission  reduction  potential  per  priority  sector     UNFCCC  (2009)  BAPPENAS  (2011)   BAPPENAS  (2010)   Sector   Percentage  of   Cost     Percentage  of     Cost     Percentage     Total   emission     (bn  US$)a   emission  reduction   (bn  US$)a   of  emission     cost     reduction  goal     (additional  15%)   reduction  goal     (bn  US$)   (26%  of   (26%  of  18.72   2.95GtCO2)   GtCO2)   Energy   0.01   0.36   8.00   0.82   63.49   1.29   Transportation   1.07   0.28   1.07   0.49   2.01   Industrial   0.03   0.06   0.14   0.25   0.23   0.47   processing   Agriculture   0.27   0.38   0.11   0.43       Forestry   4.95   11.02   3.94   22.78   21.03   0.34   Peat  land   1.76   2.03   3.73   Waste   1.63   0.65   1.07   0.53   1.12   2.3   Total   26.00   8.9   15   17.96   23.69   68.61   Sources:  UNFCCC  (2009:  27),  BAPPENAS  (2010:  125;  2011:  8)   Note:  a:  costs  are  converted  from  IDR  into  US$  at  the  exchange  rate  of  December  1,  2009.     Table  3:  Contributions  to  emission  reduction  and  indicative  cost   Emission   Indicative  costs  (IDR  trillion/year)   reduction   Sources  of  emission  reduction   Public   Private   Total   (m  tCO2e  in   2020)   Maintaining  RAN  GRK  expenditure  at  2012  levels   116   16   0   16   Additional  RAN  GRK  expenditure  in  line  with  GDP   31   4   0   4   Improving  cost  effectiveness  of  existing  expenditure   78   1-­‐2   0   1-­‐2   Power  generation  emissions  26%  lower,  incl.   104   15-­‐45   15-­‐45   40-­‐70   geothermal   Policies  to  limit  deforestation  to  450,000ha/year   260   1-­‐2   20-­‐30   21-­‐32   Reductions  required  from  new  initiatives   121   6   11   17   RAN  GRK  target  for  forest,  peatland,  energy  &   710   45-­‐75   45-­‐85   100-­‐140   transport   Reductions  from  agriculture,  industry  &  waste  water   57   Not  covered  in  this  first  MFF   Total  RAN  GRK  target   767     Source:  MoF  (2012:  xxxv).  Note:  Indicative  costs  are  expressed  in  2012  prices.     In  Ministry  of  Finance  data  presented  by  OJK  (2014b),  the  estimated  total  funding  required  to  support  the   GHG  emissions  reduction  by  26%  including  agriculture,  industry,  and  waste  were  put  at  much  higher  IDR314   trillion   (approx.   US$24.8   billion)   per   year,   or   IDR1,570   trillion   (US$123.9   billion)   for   the   period   2015-­‐2019   UNEP  Inquiry/  IFC/  AsRIA   9   Sustainable  Financing  in  Indonesia       (Figure   1).   Government   funding   was   expected   to   cover   47%   with   the   rest   coming   from   private   sector   financing.   Figure  1:  Indicative  costs  related  to  sector  contributions  toward  the  targeted  GHG  emissions  reductions     (in  IDR  trillion  per  year)   100   91   Government   90   81   Private  sectors   80   70   58   60   52   50   40   30   20   11   12   10   3   4   1   1   0   Forestry   Energy  &   Agriculture   Industry   Waste   transportation     Source:  Compiled  with  data  from  OJK  (2014:  11).     The  costs  of  necessary  investments  in  the  energy  sector  have  been  calculated  for  three  different  scenarios   for   the   country’s   two   main   power   systems,   the   Java-­‐Bali   Power   System   and   the   Sumatera   Power   System.   Investment   costs   for   developing   the   Java-­‐Bali   Power   System   are   estimated   at   between   US$55   billion   and   US$68   billion   by   reaching   emission   reductions   between   9%   and   26.4%   from   the   sectoral   BAU   level;   the   estimated   investment   cost   for   the   Sumatera   power   system   amount   to   about   US$10   billion   (BAPPENAS   2010:   109-­‐110).   2.1 Public  Funding  Availability   Discussions   of   ‘green   finance’   are   often   understood   in   terms   of   public   spending   on   green   projects,   or   investment   financed   through   international   concessional   loans   and   grants   tagged   as   ‘climate   finance’.7   According   to   Tänzler   and   Maulidia   (2013),   the   amount   of   climate   finance   pledged   to   Indonesia   “lie[s]   somewhere   in   the   area   of   USD3.1   -­‐   4.4   billion,   [and   is]   predicted   to   rise   to   over   USD5.3   billion   in   the   near   future.”8   According  to  the  MFF,  the  Indonesian  Ministry  of  Finance  devoted  IDR7.7  trillion  (US$0.6  billion)—less  than   1%   of   total   public   expenditure—of   the   2012   central   government   budget   to   implementing   the  RAN-­‐GRK   (MOF   2012).   Between   2008   and   2012   the   Indonesian   government   also   allocated   IDR4.0   trillion   (US$0.3   billion)   in   off-­‐budget   government   financing   to   government   investment   agencies   as   revolving   loan   financing   for   reforestation   and   geothermal   energy   (MOF   2012).   The   latest   review   of   public   climate   finance   in   Indonesia   gauges  that  at  least  IDR8,377  billion  (US$951  million)  of  climate  finance  from  public  sources,  including  both                                                                                                                                           7  International  sources  of  climate  finance  available  to  Indonesia  are  plenty  and  include,  inter  alia,  the  UNFCCC’s  Global  Environment  Facility   and  Green  Climate  Fund;  the  Climate  Investment  Funds  including  the  Clean  Technology  Fund  and  the  Forest  Investment  Program,  both  of   which  are  administered  by  the  World  Bank;  the  Global  Climate  Partnership  Fund  which  was  set  up  by  German  Ministry  for  Environment,  KfW   and  IFC;  the  Japan  International  Cooperation  Agency  (JICA),  the  French  Development  Agency  (AFD)  and  the  World  Bank’s  Climate  Change   Development   Policy   Loan;   the   UK’s   International   Climate   Fund;   Germany’s   International   Climate   Initiative;   Japan’s   Fast   Start   Finance,   the   ADB’s   Carbon   Market   Initiative,   Climate   Change   Fund   and   Clean   Energy   Financing   Partnership   Facility;   and   international   commitments   to   Indonesia  for  forest  conservation  through  the  UN’s  Reducing  Emissions  from  Deforestation  and  Forest  Degradation+  program  (REDD+).  In   2009,  the  Government  of  Indonesia  also  set  up  the  Indonesia  Climate  Change  Trust  Fund  (ICCTF),  which  since  then  has  received  contributions   from  DFID,  AusAID  and  SIDA.   8 An  earlier  estimate  by  Brown  and  Peskett  (2011)  gauged  that  Indonesia  had  secured  pledges  for  international  financial  support  for  climate   change  related  issues  of  about  US$4.4  billion.   UNEP  Inquiry/  IFC/  AsRIA   10   Sustainable  Financing  in  Indonesia       domestic  and  international  public  flows,  was  disbursed  in  2011  (MoF  and  CPI  2014).  This  is  significantly  below   the  Indonesian  government’s  estimates  of  the  level  of  annual  public  finance  required  by  2020  to  meet  the   national  emission  reduction  targets.   It  is  clear  then  that  the  sums  of  public  money  disbursed  for  mitigation  and  adaption  measures,  but  also  more   broadly  for  sustainable  development,  are  small  compared  to  the  actual  investment  needs.  In  its  Study  Report   on   Green   Planning   and   Budgeting   Strategy   for   Indonesia’s   Sustainable   Development   2015–2020,   the  MOF   (2015)   predicts   that   without   adoption   of   a   Green   Planning   and   Budgeting   Strategy,   “Indonesia   will   suffer   from   losses   and   damages   associated   with   climate   change   and   the   degradation   of   natural   resources”,   with   daunting  effects  on  the  country’s  growth  rate,  which  is  predicted  to  be  3.5%  lower  than  the  government’s  7%   growth  target  by  2050.  The  report  is  therefore  unambiguous  that  a  growing  share  of  existing  government   expenditure  must  be  devoted  to  green  activities.   At  the  same  time,  significant  amounts  of  available  international  climate  finance  have  remained  unspent,  such   as   large   parts   of   the   US$1   billion   made   available   by   the   Norwegian   government   for   combating   deforestation   through   REDD+   (ASrIA   2014a).   This   indicates   that   the   problem   is   not   simply   the   availability   of   funds,   but   that   there   are   bottlenecks   within   the   public   and   private   institutions   that   could   mobilize   them,   as   well   as   inadequate   financing   structures   and   business   models.   It   is   therefore   critical   to   consider   the   policy   frameworks  and  institutional  barriers  that  hold  back  sustainable  investment.   2.2 Foreign  Direct  Investment   Foreign  direct  investment  (FDI)  is  a  potentially  important  source  of  private  external  finance.  FDI  has  played   an   important   role   in   the   development   of   most   East   Asian   economies.   Indonesia,   however,   is   an   exception   in   that  inward  FDI  flows  have  been  significantly  lower  than  in  most  other  countries  of  the  region.  FDI  flows  to   Indonesia   amounted   to   60.6   trillion   IDR   in   2013   (US$4.7   trillion,   not   including   oil   &   gas,   banking,   non-­‐bank   financial  institutions,  insurance  and  leasing),  accounting  for  only  0.88%  of  GDP  over  the  period  1981-­‐2013.  This   is  much  lower  than  the  average  share  of  2.81%  of  GDP  for  all  developing  East  Asian  and  Pacific  countries  (cf.   Figure   2).   Even   if   only   the   years   2004-­‐2013   are   considered,   Indonesia’s   average   FDI-­‐to-­‐GDP-­‐ratio   of   1.9%   is   considerably   lower   than   that   of   Thailand   (3.2%),   Malaysia   (3.6%),   China   (4.2%),   Vietnam   (5.9%),   or   all   developing  East  Asia  and  Pacific  countries  (3.9%).  As  pointed  out  by  Lipsey  and  Sjöholm  (2011:  35),  FDI  inflows   to  Indonesia  “have  been  lower  than  could  be  expected  from  Indonesia’s  size,  population  and  other  country   characteristics.”   Salim   (2014:   272)   relates   Indonesia’s   difficulties   in   attracting   FDI   to   “disincentives   such   as   limited   infrastructure,   and   relatively   complicated   and   time-­‐consuming   investment   procedures,   which   remain   unsolved.”   Figure  2:  Foreign  direct  investment,  net  inflows  (%  of  GDP)   11   China   9   Indonesia   7   Cambodia   Korea,  Rep.   5   Lao  PDR   3   Malaysia   Philippines   1   Thailand   -­‐1   1981   1986   1991   1996   2001   2006   2011   Vietnam   -­‐3     Source:  Compiled  with  data  from  WDI,  January  2015.     UNEP  Inquiry/  IFC/  AsRIA   11   Sustainable  Financing  in  Indonesia       The   Indonesian   government   generally   encourages   FDI,   however,   the   Foreign   Investment   Law   requires   approval   through   the   Indonesia   Investment   Coordinating   Board   (Badan   Kordinasi   Penanaman   Modal,   BKPM).  In  its   FDI  Strategy  Paper  2010,  BKPM  (2010:  49)  highlighted  it  would  “place  emphasis  on  investment   that   mitigates   the   pernicious   effects   of   climate   change.   This   can   be   investment   that   brings   clean   technology   to   resource   extraction   or   uses   sustainable   design   in   the   building   of   infrastructure.”   Apparently   there   are,   however,   no   formal   sustainability   standards   to   FDI   imposed   by   BKPM.   Foreign   investors   to   Indonesia   can   generally   hold   up   to   100%   ownership,   although   in   certain   industries   foreign   ownership   is   restricted   to   between   45%   to   95%   while   industries   on   an  “Investment   Negative   List”   (Presidential   Regulation   39/2014)   are   closed   to   foreign   investment   altogether.   Sectors   with   restricted   foreign   ownership   include   telecommunications,   transport   services,   energy   and   mineral   resources,   agriculture,   forestry,   maritime   and   fisheries,   healthcare,   pharmaceuticals,   finance   and   banking,   education,   and   alcoholic   beverages,   among   others.   Many   of   these   sectors   are   the   ones   most   likely   to   benefit   from   green   investment,   and   given   the   restrictions  on  potential  foreign  investment  in  these  areas,  domestic  finance  will  have  to  fill  the  gap.   Figures   3   and   4   show   the   destination   sectors   for   FDI   and   the   source   countries,   respectively.   In   2013,   as   in   previous   years,   the   largest   share   of   FDI   went   into   manufacturing   (55.3%),   followed   by   the   services   sector   (22.7%),   mining   (16.8),   and   food   crops   and   plantation   (5.6%).   The   most   important   source   countries   in   2013   were  Japan  (16.3%)  and  Singapore  (16.3),  followed  by  the  US  (8.4%),  South  Korea  (7.7%)  and  the  UK  (3.9%).   Figure  3:  Destination  sectors  of  FDI  in  2013  (%  of  total  FDI)   60.00   55.34   50.00   40.00   30.00   22.07   16.81   20.00   10.00   5.60   0.11   0.04   0.04   0.00     Figure  4:  FDI  by  country  of  origin  in  2013  in  US$  billion  (and  as  %  of  total  FDI)   16   47% 14   12   10   8   6   16%   16% 4   8% 8% 4% 2   0   Japan   Singapore   USA   South  Korea   UK   Others     Source  (figure  3  and  4)  :  Compiled  with  data  from  BKPM.     UNEP  Inquiry/  IFC/  AsRIA   12   Sustainable  Financing  in  Indonesia       3 Indonesia’s  Financial  System   3.1 Financial  Regulatory  Authorities,  Public  Authorities  and  Industry  Bodies   To  facilitate  the  following  analysis  of  sustainable  finance  in  Indonesia,  this  section  provides  a  brief  overview   of  the  relevant  financial  regulatory  authorities,  public  authorities  and  industry  bodies:   ¥ Indonesia  Financial  Services  Authority  (Otoritas  Jasa  Keuangan,  OJK):  OJK  is  the  financial  regulator   established  in  January  2013  with  authority  to  regulate,  supervise,  examine  and  investigate  the   financial  services  sector  in  Indonesia.  OJK  is  an  independent  entity  reporting  to  the  parliament   (People’s  Representative  Council).  Its  mandate  includes  banking,  capital  markets  and  non-­‐bank   financial  institutions  (NBFI,  including  pension,  insurance,  finance  companies,  venture  capital,   guarantee  companies,  and  microfinance  institutions).  With  its  establishment,  OJK  assumed   responsibility  for  capital  markets  from  the  Indonesian  Capital  Market  and  Financial  Institution   Supervisory  Agency  (Badan  Pengawas  Pasar  Modal  dan  Lembaga,  BAPEPAM-­‐LK),  the  abandoned   capital  markets  agency  under  the  Ministry  of  Finance  responsible  for  capital  markets  and  NBFI.  In   January  2014,  OJK  took  over  banking  regulation  and  supervision  from  Bank  Indonesia.     ¥ Bank  Indonesia:  The  Indonesian  central  bank  is  responsible  for  monetary  policy,  macro  prudential   regulation,  the  payment  systems  and  foreign  exchange.  Its  mandate  is  to  achieve  and  maintain   rupiah  stability  by  maintaining  monetary  stability  and  financial  stability  for  supporting  sustainable   economic  development.  It  interprets  “sustainable  economic  development”  in  line  with  national   policy  as  “pro-­‐growth,  pro-­‐job,  pro-­‐poor,  and  pro-­‐environment”.  It  has  recently  passed   responsibility  for  regulation  of  banking  to  the  OJK.  Bank  Indonesia  also  reports  to  the  People’s   Representative  Council.     ¥ Ministry  of  Finance  (Kementerian  Keuangan):  Besides  setting  and  managing  central  government   budgets  together  with  the  National  Development  Planning  Agency  (BAPPENAS),  the  Ministry  of   Finance  is  responsible  for  the  formulation,  stipulation,  and  implementation  of  financial  policies.     ¥ Directorate  General  of  Debt  Management  (Direktorat  Jenderal  Pengelolaan  Utang,  DJPU):  DJPU  is   the  unit  in  the  Ministry  of  Finance  responsible  for  government  debt  securities  management.     ¥ Indonesia  Deposit  Insurance  Corporation  (Lembaga  Penjamin  Simpanan,  LPS):  All  banks  that   operate  in  Indonesia  are  obliged  to  become  a  member  of  the  deposit  insurance  system  managed  by   LPS.  Bank  deposits  are  insured  up  to  IDR2  billion  (about  US$165,000).     ¥ Indonesian  Stock  Exchange  (PT  Bursa  Efek  Indonesia,  BEI/IDX)  is  a  private  company  that  is  self-­‐ regulating  and  enacts  its  own  rules  on  listing  and  membership  requirements.  It  monitors  trading,   settlement,  and  listed  companies’  compliance  with  its  regulations.  It  also  receives  corporate  action   notifications  from  companies  and  announces  them  to  the  market.     ¥ Indonesian  Clearing  and  Guarantee  Corporation  (PT  Kliringdan  Penjaminan  Efek  Indonesia,  KPEI):   KPEI  is  a  limited  liability  company  that  acts  as  a  clearing  and  settlement  guarantee  institution  for   stock  exchange  transactions.     ¥ Indonesian  Central  Security  Depository  (PT  Kustodian  Sentral  Efek  Indonesia,  KSEI):  KSEI  is  a   private  limited  liability  company  that  acts  as  the  only  central  depository  for  equity  and  corporate   bonds  in  the  Indonesian  market.     ¥ Financial  industry  associations  include:  Indonesian  Securities  Investor  Association  (Asosiasi   Perusahaan  Efek  Indonesia,  APEI);  Indonesian  Pension  Fund  Association  (Asosiasi  Dana  Pensiun   Indonesia,  ADPI);  Association  of  Indonesian  General  Insurance  Companies  (Asosiasi  Asuransi  Umum   Indonesia,  AAUI);  Indonesian  Mutual  Fund  Managers  Association  (Asosiasi  Pengelola  Reksa  Dana   Indonesia,  APRDI);  and  Indonesian  Credit  Card  Association  (Asosiasi  Kartu  Kredit  Indonesia,  AKKI).     To   develop   a   sustainable   financial   system   in   Indonesia,   it   will   be   important   to   involve   all   relevant   UNEP  Inquiry/  IFC/  AsRIA   13   Sustainable  Financing  in  Indonesia       stakeholders   in   the   financial   sector,   in   addition   to   overcoming   real   economy   barriers   to   sustainable   investments.  OJK  is  clearly  in  a  lead  role  and,  as  will  be  discussed  below,  has  already  taken  important  steps   and  developed  a  comprehensive  Roadmap  for  Sustainable  Finance.  OJK  has  been  able  to  build  upon  the  work   previously   conducted   by   Bank   Indonesia   on   sustainable   finance.   As   macroprudential   regulator,   Bank   Indonesia   may   still   have   an   important   role   to   play  in   dealing   with   climate   and   other   ecological   risks   to   the   Indonesian  economy  (Schoenmaker  et  al.  2014;  Volz  2014).  The  Ministry  of  Finance  can  affect  the  lending  and   investment   decisions   of   banks   and   NBFIs,   as   well   as   the   investment   decisions   of   individuals   and   of   non-­‐ financial   corporations   through   various   tax   and   subsidy   schemes.   The   stock   exchange   can   affect   corporate   behaviour   through   listing   requirements.   And   last   but   not   least,   financial   industry   associations   can   play   an   important  role  in  disseminating  information  on  sustainable  finance  as  well  as  training  and  capacity  building   activities.   3.2 Sources  and  Channels  for  Capital  Allocation   Indonesia’s   financial   system   is   dominated   by   banking.   The   banking   sector   holds   78.6%   of   total   assets   of   all   financial   institutions,   which   stood   at   IDR6   611.67   trillion   (US$   550   billion)   in   June   2014   (excluding   venture   capital  firms,  investment  managers  and  securities  companies)  (Figure  5).   Figure  5:  Asset  composition  of  financial  institutions  in  June  2014   100%   78.6%   80%   60%   40%   20%   10.5%   2.6%   6.4%   1.2%   0.1%   0.5%   0%     Source:  Compiled  with  data  from  Bank  Indonesia  (2014:  14).   Between   2010   and   2014,   between   68%   and   78%   of   private   sector   financing   was   provided   by   the   banking   sector  (Table  4).  Corporate  bond  issuance  accounted  for  only  between  8%  and  11%  of  private  sector’s  total   external  financing.   Table  4:  Bank  and  non-­‐bank  financing  to  private  sector  (in  trillion  IDR)     2010   2011   2012   2013   2014  (Q1:Q2)   Bank  credit   327.92   434.25   507.77   585.01   175.29   Non-­‐bank  financing   156.76   158.96   154.32   161.02   71.51          Capital  market   112.95   100.01   97.57   115.04   58.61                  IPO  and  rights  issues   76.35   54.28   30.10   57.54   30.43                  Corporate  bonds   36.60   45.74   67.46   57.50   28.18        Finance  companies   43.81   58.95   56.75   45.98   12.90   Total   484.68   593.21   662.09   746.03   246.8   UNEP  Inquiry/  IFC/  AsRIA   14   Sustainable  Financing  in  Indonesia       Source:  Compiled  with  data  from  Bank  Indonesia  (2014:  55).     Banking   The   banking   system   has   two   tiers,   comprising   119   commercial   banks   and   1,643   rural   banks   (January   2015),   which   are   usually   owned   by   regional   governments.   Commercial   banks   include   the   four   large   state-­‐owned   banks,9  35  foreign  exchange  banks,  30  non-­‐foreign  exchange  banks,  26  regional  development  banks  (Bank   Pembangunan   Daerah,   BPDs),   14   joint   venture   banks,   and   10   foreign-­‐owned   banks.   11   of   the   commercial   banks  are  Islamic  banks.  Of  the  rural  credit  banks,  163  are  Islamic  banks.  Rural  banks  play  an  important  role  in   Indonesia   and   provide,   mainly   at   the   village   level,   deposit   and   credit   services   to   a   large   number   of   individual   clients   with   small   financial   resources.10  However,   98%   of   all   banking   assets   are   held   by   the   commercial   banks   (Table   5).   Among   the   commercial   banks,   about   70%   of   total   banking   assets   are   concentrated   in   the   ten   largest  banks—Bank  Mandiri,  Bank  Rakyat  Indonesia,  Bank  Central  Asia,  Bank  Negara  Indonesia,  CIMB  Niaga,   Bank   Danamon   Indonesia,   Bank   Permata,   Bank   Pan   Indonesia,   Bank   Tabungan   Negara,   and   Bank   Internasional  Indonesia.   Table  5:  Bank  industry  operations,  2007  –  August  2014     2007   2008   2009   2010   2011   2012   2013   Aug  14   Total  assets  (in  bn  IDR)                     Commercial  banks   1,986,501   2,310,557   2,534,106   3,008,853   3,652,832   4,262,587   4,262,587   4,211,039     Rural  banks   27,741   32,533   37,554   45,742   55,799   67,397     67,397   67,610   Total  banks                     Commercial  banks   130   124   121   122   120   120   120   120     Rural  banks   1,817   1,772   1,733   1,706   1,669   1,653   1,653   1,653   Total  bank  offices                     Commercial  banks   9,680   10,868   12,837   13,837   14,797   16,625   16,625   16,821     Rural  banks   3,250   3,367   3,644   3,910   4,172   4,425     4,425   4,448   Source:  Compiled  with  data  from  Indonesia  Banking  Statistics,  August  2014.     At  38%,  the  ratio  of  domestic  credit  to  the  private  sector  to  GDP  in  Indonesia  is  on  a  similarly  low  level  as  in   Brunei  Darussalam  (35%),  the  Philippines  (36%)  and  Cambodia  (45%),  and  much  lower  than  in  other  Southeast   Asian  countries  like  Thailand  (154%),  Singapore  (129),  Malaysia  (214)  and  Vietnam  (97%)  (World  Development   Indicators  data  for  2013).  The  cost  of  intermediation  in  Indonesia’s  banking  system  is  high,  with   average   net   interest   rate   margins   for   the   country’s   big   banks   being   7   percentage   points—the   highest   among   the   G20   countries   as   well   all   ASEAN   countries.11  According   to   Bloomberg,   the   average   return   on   equity   for   the   country’s  five  largest  banks  is  23%  (Vallikappen  and  Moestafa  2015).  Real  lending  rates  are  high,  while  lending   is  generally  short-­‐term,  which  is  typically  a  constraint  for  green  investments.     In  this  context,  it  is  important  to  mention  Indonesia’s  problems  with  financial  inclusion.  Only  20%  of  adults   have   an   account   at   a   formal   financial   institution;   among   the   poorest   20%   of   the   population   the   share   of                                                                                                                                           9  The  ‘big  four’  state-­‐owned  banks  are:  Bank  Negara  Indonesia  (BNI),  Bank  Rakyat  Indonesia  (BRI),  Bank  Tabungan  Negara  (BTN),  and  Bank   Mandiri.  Together  they  hold  about  a  third  of  all  earning  assets  in  the  banking  sector.   10  Basic   banking   services   are   also   provided   by   about   13,000   cooperatives   that   are   supervised   by   the   Ministry   of   Cooperatives   and   Small-­‐ Medium  Enterprises.   11  Banks  charge  an  average  of  12%  on  loans,  while  the  average  deposit  rate  is  5%.   UNEP  Inquiry/  IFC/  AsRIA   15   Sustainable  Financing  in  Indonesia       adults   holding   an   account   is   even   lower   with   only   8%   (Demirgüç-­‐Kunt   and   Klapper   2013).   According   to   the   World   Bank’s   latest   Enterprise   Survey   report   on   Indonesia,   access   to   finance   is   a   significant   constraint   on   doing   business,   with   only   51%   of   Indonesia   companies   having   a   checking   or   savings   account   and   only   18%   making  use  of  a  bank  loans  or  formal  credit  lines  (World  Bank  2010).   According  to  Machmud  and  Huda  (2011:   272),   only   56%   of   all   small-­‐   and   medium-­‐sized   enterprises   (SMEs)   in   Indonesia   have   access   to   formal   financial   institutions.   The   access   to   finance   problem   is   connected   to   Indonesia’s   weak   institutional   and   legal   framework,   as   a   “lack   of   information   about   borrowers,   restrictions   on   collateral,   and   the   difficulty   and   expenses   of   recovery   in   cases   of   default,   all   make   lenders   generally   hesitant   to   grant   loans,   especially   to   small   businesses   or   to   new   forms”   (Tipton   2008:   427).   Many   SMEs   rely   on   internal   sources   of   finance   (retained   earnings,   loans   from   employees   or   owners’   private   savings)   or   resort   to   informal   external   sources,   including   relatives,   friends   or   loan   sharks   (Machmud   and   Huda   2011).   The   lack   of   access   to   bank   finance   is   seen  as  a  major  barrier  toward  green  investments  (UNIDO  2009).     Capital  markets   Equity   markets   have   grown   eighteen   fold   from   US$26.8   billion   to   US$477.5   billion   between   2000   and   2013   (Figure  6).  Over  the  same  time,  Indonesian  bond  markets  have  merely  doubled  in  size,  from  US$52.8  billion   to  US$118  billion.  In  June  2013,  credit  extended  by  the  banking  sector  was  still  three  times  larger,  at  US$359.7   billion,   than   the   size   of   domestic   bond   markets,   at   US$118.0   billion.   Bond   markets,   especially   corporate   local   currency  bond  markets,  which  have  grown  from  a  meagre  IDR15.2  trillion  (US$2.6  billion)  in  December  1997   to   IDR220.2   trillion   (US$22.2   billion)   in   June   2013   (Figure   7),   clearly   have   an   important   role   to   play   as   a   source   of  long-­‐term  funding  for  green  investment.   Figure  6:  Equity,  bonds  and  domestic  credit  (in  billion  US$),  December  2000  –  June  2013   1,000   Domestic  Credit   900   Bonds   800   Equity   700   600   500   400   300   200   100   0   Dec  2000   Dec  2005   Dec  2007   Mar  2009   Jun  10   Sep  11   Dec  2012     Source:  Compiled  with  data  from  ADB  AsianBondsOnline,  January  2015.     UNEP  Inquiry/  IFC/  AsRIA   16   Sustainable  Financing  in  Indonesia       Figure  7:  Size  of  local  currency  bond  market  (in  billion  IDR),  December  1997  –  September  2014   1,600,000   Government   1,400,000   Corporate   1,200,000   1,000,000   800,000   600,000   400,000   200,000   0   Dec   Dec   Sep   Dec   Mar   Jun   Sep   Dec   Mar   Jun  14   1997   2002   05   2006   2008   09   10   2011   2013     Source:  Compiled  with  data  from  ADB  AsianBondsOnline,  January  2015.     Indonesian   capital   markets   are   highly   institutionalized   and   dominated   by   foreign   investors.   According   to   the   Indonesian   Central   Securities   Depository   (Kustodian   Sentral   Efek   Indonesia,   KSEI),   foreign   investors   held   64.8%   of   tradable   stocks   listed   in   the   Indonesian   Stock   Exchange   in   November   2014   (Table   6).   Foreign   investors   are   estimated   to   hold   almost   80%   of   free   floating   Indonesian   stocks   (Nangoy   2014).12  In   the   government  bond  market  foreigners  held  33.4%  of  outstanding  bonds  in  November  2014  (Figure  8).13  Foreign   banks  and  leveraged  funds  are  estimated  to  hold  about  10-­‐25%  of  foreign  holdings  in  the  government  bond   market;   real-­‐money   funds,   45-­‐60%;   and   central   banks   and   sovereign   wealth   funds,   25-­‐30%   (Standard   Chartered  2014:  52).   Table  6:  Distributions  of  tradable  stocks  based  on  investors’  nationality,  2011–2014   Investors’  nationality     Nov.  2014   2013   2012   2011   (Equity  only)     (IDR  billion)   %   (IDR  billion)   %   (IDR  billion)   %   (IDR  billion)   %   Local  investor     1,001,403   35%   868,718   37%   1,040,619   41%   839,319   40%              Individual     164,533   16%   157,417   18  %   140,026   13%   150,951   17%              Institution     834,317   83%   709,834   81  %   899,339   86%   687,203   81%              Others     2,552   <1%   1,466   <1%   1,254   <1%   1,166   <1%   Foreign  investor     1,845,835   64%   1,475,457   63%   1,484,385   59%   1,251,886   60%              Individual     13,728   <1%   25,687   2%   31,145   2%   23,704   2%              Institution     1,260,240   68%   975,049   66%   1,025,196   69%   907,916   72%              Others     571,867   31%   474,720   32%   428,044   29%   320,266   26%   Total     2,847,239       2,344,174       2,525,005       2,091,205       Source:  Compiled  with  data  from  KSEI,  November  2014.Note:  Institutional  investors  include  insurance,  mutual  funds,  pension  funds,   financial  institutions,  corporations,  securities  companies,  and  foundation.                                                                                                                                           12  Between   2002   and   2007,   foreign   institutions   held   almost   70%   of   the   free-­‐float   value   of   the   Indonesian   equity   markets,   with   individuals   holding  less  than  5%  (KPMG  2013:  13).   13  According  to  data  from  ADB's  AsianBondsOnline,  the  share  of  foreign  holding  of  local  currency  government  bonds  reached  an  all-­‐time  high   with  38.1%  in  December  2014.   UNEP  Inquiry/  IFC/  AsRIA   17   Sustainable  Financing  in  Indonesia       Figure  8:  Government  bond  ownership,  November  2014  (in  IDR  trillion  and  %)   600   39.4%   45% 40% 500   33.4%   35% 400   30% 25% 300   20% 200   12.4%   15% 4.9%   10% 100   3.7%   3.5%   2.6%   0.07%   0.03%   5% 0   0%   Source:  Compiled  with  data  from  DJPU.   In  the  mutual  fund  industry,  the  total  net  asset  value  (NAV)  was  IDR266.22  trillion  (US$21.09  billion)  at  the   end  of  2014.  Equity-­‐based  funds  accounted  for  a  large  share  of  the  market  (IDR90.16  trillion),  with  smaller   market  shares  by  fixed-­‐income  funds  (IDR30.2  trillion),  mixed-­‐asset  funds  (IDR18.34  trillion),  protected  funds   (IDR42.8  trillion),  foreign-­‐exchange  funds  (IDR16.1  trillion)  and  Sharia-­‐compliant  funds  (IDR9.17  trillion).  Even   though  the  number  of  funds,  as  well  as  NAV,  has  been  growing  over  the  last  years  (Table  7),  the  mutual  fund   industry   remains   nascent.   According   to   OJK,   about   250,000   people   have   invested   in   mutual   funds   as   of   December  2014,  only  a  small  fraction  of  the  Indonesian  population.   Table  7:  Total  net  asset  value  (NAV)  of  mutual  funds  and  number  of  products  (end-­‐year)     2011   2012   2013   2014   Total  NAV  (IDR  trillion)   202.40   223.03   192.54   266.22   Number  of  funds   767   809   823   828   Source:  Compiled  with  data  from  OJK   With  assets  amounting  to  IDR694.23  trillion,  insurance  firms  held  10.5%  of  total  assets  of  financial  institutions   in  June  2014  (Figure  5),  including  12.4%  of  outstanding  government  bonds  (Figure  8).  There  are  currently  49   life  and  83  loss  insurance  companies  in  Indonesia  (Table  8).  Foreign  investors  are  involved  in  19  joint  venture   life   insurance   companies,   which   have   more   than   half   of   the   life   market   share,   and   18   joint   venture   loss   insurance  companies,  which  have  only  around  a  10%  non-­‐life  market  share.   Table  8:  Number  of  insurance  firms   Insurance  profile   State-­‐owned   Private  national   Joint  venture   Total   Life  insurance   1   29   19   49   Loss  insurance   3   62   18   83   Reinsurance   2   2     4   Social  insurance  programs     2       2   Insurers  of  civil  servants,  army  and  police   3       3   Total   11   93     141   Source:  Compiled  with  data  from  Bank  Indonesia  (2014:  11). UNEP  Inquiry/  IFC/  AsRIA   18   Sustainable  Financing  in  Indonesia       Aligning  the  financial  system  to  sustainable  development   3.3 Flows  of  Green  Finance   Banking   A  review  by  Bank  Indonesia  of  green  lending  by  banks—where  green  lending  was  defined  as  lending   across   four   categories:   renewables,   sustainable   agriculture,   green   industry   and   ecotourism—found   that   amongst   29  banks  surveyed  between  2011  and  2013  the  share  of  lending  identified  as  green  was  very  small,  with  only   1.2%  of  total  lending  described  as  green  in  2011  (Table  9).  The  share  of  green  lending  increased  slightly  to  1.3%   in  2012  and  1.4%  in  2013,  amounting  to  IDR10.2  trillion  (about  US$1  billion).  It  is  noteworthy  that  the  portion  of   green   financing   as   share   of   total   financing   in   Islamic   banks   is   double   compared   with   conventional   banks,   according   to   this   survey.   However,   another,   more   comprehensive   banking   survey   carried   out   by   the   German   Development   Institute   and   Bank   Indonesia   in   2013   did   not   find   any   discernible   differences   between   conventional   and   Islamic   banks   with   respect   to   green   lending   or   green   banking   practices  (cf.   Section   4.4).   Most   of   the   financing   identified   as   green   went   into   renewable   energy,   while   around   20%   went   into   environmentally  efficient  machineries  and  sustainable  agriculture  each  (Figure  9).   Table  9:  Banks’  green  financing  portfolio,  2011-­‐2o13   2011   2012   May  2013       GF   Total   GF  as  share     GF   Total   GF  as   GF     Total     GF  as   (tn  IDR)   financing   of  total    (tn  IDR)   financing   share  of   (tn  IDR)   financing   share     (tn  IDR)   financing     (tn  IDR)   total    (tn  IDR)   of  total     (%)   financing   financing   (  %)   (%)   24  conventional   5.48   500.4   1.10   7.7   66.4.17   1.16   8.62   681.47   1.27   banks   5  Islamic  banks   1.02   37.9   2.68   1.6   56.18   2.85   1.61   63.57   2.53   Total   6.4   538.3   1.19   9.3   720.35   1.29   10.2   745.04   1.37   Source:  Siregar  (2014:  5).     Figure  9:  Distribution  of  green  financing  by  project  (in  %),  2012   30   26.1   25.7   25   19.6   19.5   20   15   10   4.6   5   2.2   2.4   0     Source:  Compiled  with  data  from  Bank  Indonesia/OJK.       UNEP  Inquiry/  IFC/  AsRIA   19   Sustainable  Financing  in  Indonesia       Capital  markets   The   Indonesia   market   for   sustainable   investments   remains   in   an   early   stage   of   development.   According   to   the   2014  Asia  Sustainability  Investment  Review,  sustainable  investments  reached  US$1.14  billion  at  the  end  of   2013,  which  is  almost  a  doubling  since  2011  (ASrIA  2014b:  34).  Table  10  provides  an  overview  of  the  strategies   used  for  sustainable  investments  in  the  Indonesian  market.     Table  10:  Breakdown  of  strategy   Strategy   Assets  under  management  as  of     As  %  of  total     31  December  2013  (in  US$  million)   sustainable  investments   Negative/exclusionary  screening   1,101   96.41   Positive/best-­‐in-­‐class  screening   3   0.26   Sustainability-­‐themed  investing   7   0.61   Integration  of  ESG  issues   31   2.71   Corporate  engagement  and   -­‐     shareholder  action   Total   1,142   100   Source:  ASrIA  (2014b:  34).   Sustainable   investment   in   Indonesia   is   almost   entirely   based   on   Shariah-­‐compliance,   with   99%   of   sustainable   assets  being  described  as  Islamic  assets  (ASrIA  2014b).  Assets  managed  consistent  with  Islamic  law  or  Sharia   principles   are   included   in   the   Asia   Sustainability   Investment   Review   on   the   ground   that   such   assets   require   additional  screening  compared  to  conventional  asset  management.  As  explained  by  ASrIA  (2014b:  12),  “[i]n   many  instances,  these  funds  have  much  in  common  with  certain  'ethical  funds'  (e.g.,  exclusion  of  alcohol  as   used   by   many   other   funds   based   on   religious   principles).”   Most   Sharia-­‐compliant   assets   are   based   on   negative  or  exclusionary  screening,  but  some  Sharia  funds  are  also  managed  by  integrating  environmental,   social  and  governance  (ESG)  issues.   The   low   level   of   sustainable   investment   is   in   sharp   contrast   to   the   investment   opportunities   that   a   fast-­‐ growing   emerging   economy   like   Indonesia   offers.   The   low   level   of   investment   in   renewable   energy   epitomizes   the   challenges   Indonesia   faces.   On   the   one   hand,   as   discussed   above,   Indonesia   has   enormous   investment  needs  in  its  energy  infrastructure  to  keep  the  economy  growing.  On  the  other  hand,  as  can  be   seen  in  Table  11,  Indonesia’s  potential  in  renewable  energy  is  enormous,  yet  little  of  this  potential  has  been   tapped  thus  far.  For  instance,  the  Ministry  of  Energy  and  Mineral  Resources  estimates  that  Indonesia  has  a   potential  of  28.53  GW  from  geothermal—about  40%  of  the  world’s  entire  geothermal  reserves.  But  only  4%   of   this   has   been   developed   hitherto.   Likewise,   less   than   6%   of   the   country’s   hydro   power   resources   and   only   1%  of  the  biomass  resources  have  been  developed  for  energy  generation.  Overall,  over  the  period  2006-­‐2013,   only   US$5.7   billion   have   been   invested   in   clean   energy   (Table   12,   see   also   Figure   10).   In   the   last   two   clean   energy  investment  rankings  published  by  the  Pew  Charitable  Trust  (2013,  2014),  Indonesia  ranked  only  19  out   of   20.   Hence,   there   is   a   large   growth   potential   in   renewable   energy,   which   will   need   large   amounts   of   investment  to  be  released.       UNEP  Inquiry/  IFC/  AsRIA   20   Sustainable  Financing  in  Indonesia         Table  11:  Renewable  energy  potential  vs.  installed  capacity   Renewable  energy  source   Potential   Installed  capacity   Installed  to  potential  ration  (%)   Hydro  power   75.67  GW   4.2  GW   5.55   Geothermal   28.53  GW   1.19  GW   4.2   Micro/mini  hydro   500  MW   86.1  MW   17.56   Biomass   49.81  GW   445  MW   0.89   Solar  power   4.8  kWh/m2/day   14.1  MW   –   Wind  power   3-­‐6  m/2   1.4  MW   0.015   Nuclear  (uranium)   3  GW   –   –   Source:  Ministry  of  Energy  and  Mineral  Resources.     Table  12:  Total  clean  energy  investments  by  type,  2006-­‐2013(in  US$  million)   VC/PE  investments   59.270   Corporate  finance  investments   41.515   Asset  finance  investments   5,615.216   Total   5,716.001   Source:  Climatescope  2014,  http://global-­‐climatescope.org/en/country/indonesia/#/details.     Note:   VC/PE   investments   include:   early-­‐   and   late-­‐stage   venture   capital   funding   of   pure-­‐play   clean   energy   companies  and  funds  raised  privately  for  the  purpose  of  expansion.  Corporate  finance  investments  include:   clean  energy  deals  from  mergers  and  acquisitions,  public  markets,  joint  ventures  and  corporate  debt.  Asset   finance   investments   include:   new   build,   refinancing   and   acquisitions   of   renewable   energy   generating   projects.     Figure  10:  Annual  investment  in  clean  energy,  2008-­‐2013  (million  US$)   1,395   1,400   1,200   1,000   800   671   642   600   507   457   395   400   200   0   2008   2009   2010   2011   2012   2013   Source:  Compiled  with  data  from  Climatescope  (2014).     UNEP  Inquiry/  IFC/  AsRIA   21   Sustainable  Financing  in  Indonesia       Overall,  despite  some  positive  trends,  the  sustainable  investment  market  is  still  embryonic.  As  pointed  out   by   ASrIA   (2014b:   34),   “investors   continue   to   channel   funds   towards   assets   that   maximize   short-­‐term   risk   adjusted  investment  returns,  with  environmental,  social  or  governance  considerations  of  less  concern”.   3.4 Policies  to  Promote  Sustainable  Finance   Bank   Indonesia   and   subsequently   OJK   have   progressively   addressed   sustainability   issues.   Legislation   requiring   environmental   assessments   for   loans   has   been   gradually   strengthened.   Environmental   impact   assessments  have  been  integrated  in  bank  obligations  for  large  loans  since  1998.  Bank  Indonesia  Act  10/1998   obligates   banks   to   conduct   an   environmental   impact   assessment   for   large   loans   or   high   risks   loans.14  In   January   2005,   Bank   Indonesia   issued   Regulation   No.   7/2/   PBI/2005   on   Asset   Quality   Rating   for   Commercial   Banks,   where   Article   11.1.e   requires   banks   to   appraise   the   “measures   taken   by   the   debtor   to   conserve   the   environment”   as   part   of   an   assessment   of   the   debtor’s   business   prospects.15  The   implementation   of   Regulation  No.  7/2/PBI/2005  was  discussed  at  a  national  workshop  on  “The  Roles  and  Benefits  of  Sustainable   Development   from   Banking   Perspectives”   that   Bank   Indonesia   hosted   jointly   with   the   Ministry   of   Environment   (Kementerian   Lingkungan   Hidup,   KLH)   in   Batam   in   December   2005.   At   this   workshop,   the   Director   of   Bank   Indonesia’s   Research   and   Banking   Regulation   Department   emphasized   that   “[g]overnment   regulations  such  as  environmental  impact  analysis  (AMDAL)  requirements  and  performance  ratings  program   (PROPER)   can   be   used   as   an   early   warning   system   and   promote   good   corporate   governance.   Other   institutions,   such   as   public   accounting   offices,   appraisals   companies   and   rating   agencies   also   play   an   important   role”   (Syahdan   2005).   In   2012,   Article   11.1.e   of   Bank   Indonesia   Regulation   No.   14/15/PBI/2012   concerning   the   Assessment   of   Commercial   Bank   Asset   Quality   reiterated   banks’   obligation   to   consider   the   “efforts   undertaken   by   the   debtor   in   the   framework   of   environment   conservation”   as   part   of   their   assessment  of  debtors’  business  prospects.     In  practice,  however,  banks  merely  check  whether  the  debtor  has  a  valid  UKL-­‐UPL  or  AMDAL  license  without   carrying   out   further   environmental   risk   analysis.   Bank   Indonesia   has   also   encouraged   banks   to   take   into   consideration   the   PROPER   rating   for   debtors   that   have   received   such   rating   by   the   Ministry   of   Environment.16   In   2010,   the   Governor   of   Bank   Indonesia   and   the   State   Minister   of   the   Environment   signed   a   Joint   Agreement   on   Coordinating   the   Increased   Role   of   Banking   in   Environmental   Conservation   and   Management.   In   this   memorandum   of   understanding   (MOU),   Bank   Indonesia   and   KLH   agreed   on   a   joint   work   program   for   the   period   2011-­‐2013,   which   included   a   number   of   seminars   and   workshops   for   bankers   on   environmental   risk   assessment   and   green   finance   prospect,   joint   research   on   green   financing,   and   the   development   of   practical   measures   to   promote   green   finance.   Bank   Indonesia   started   awareness   building   in   the  banking  industry  through  focused  group  discussions  and  seminars  in  2011.  The  first  two  capacity  building   workshops   for   bank   officers   and   supervisors   were   carried   out   in   2012,   one   with   the   support   of   the   UNEP   Finance  Initiative  (UNEP  FI)  on  environmental  and  social  risk  assessment,  and  another  one  with  the  support                                                                                                                                           14 The   Elucidations   to   the   Act   of   the   Republic   of   Indonesia   No.   7   of   1992   Concerning   Banking   as   Amended   by   the   Act   of   the   Republic   of   Indonesia  Number  10  of  1998  state:  “Prudential  principles  must  be  adhered  consistently,  meanwhile  the  regulationson  bank  activities  have   to   be   improved   especially   those   relating   to   the   extension   offunds,   including   the   increasing   role   of   an   Analysis   on   the   Environmental   Impact   (“AMDAL”)   for   big   scale   company   or   high   risk   company.”   All   Indonesian   companies   are   required   by   the   “Regulation   on   Environmental   Permits”  to  obtain  an  environmental  license  as  precondition  for  receiving  a  business  license.  The  environmental  license  can  be  obtained  by   completing   one   of   the   two   environmental   impact   assessments,   either   the   UKL-­‐UPL   (Upaya   Pengelolaan   Lingkungan   Hidupdan   Upaya   Pemantauan   Lingkungan   Hidup)   assessment   or   the   more   comprehensive   AMDAL   (Analisis   Mengenai   Dampak   Lingkungan)   assessment   for   companies  in  sectors  with  a  potentially  significant  impact  on  the  environment.   15 The  assessment  of  “business  prospects”  is  one  of  thee  rating  factors  for  credit  quality.  The  other  two  are  “performance  of  the  debtor”   and  “repayment  capability”  (cf.  Bank  Indonesia  Regulation  No.  7/2/  PBI/2005,  Article  10).   16  The   PROPER   rating   was   introduced   by   KLH   in   1995   (Program   for   Pollution   Control,   Evaluation,   and   Rating).   PROPER   aims   to   enhance   industrial   compliance   with   pollution   control   regulation.   Companies   get   colour-­‐coded   from   gold   (beyond   compliance)   to   green   (good   compliance),  blue  (satisfactory  level  of  compliance),  red  (not  complying)  and  black  (seriously  not  complying)  (cf.  World  Bank  2003).  Thus  far   1,400  companies  have  been  audited  by  the  program.  Firms  with  a  black  PROPER  rating  can  theoretically  have  their  licence  withdrawn  and  be   closed  down.   UNEP  Inquiry/  IFC/  AsRIA   22   Sustainable  Financing  in  Indonesia       of  USAID  on  the  financing  of  renewable  energy  projects.17  Together  with  KLH,  Bank  Indonesia  organized  four   more   training   workshops   on   environmental   analysis   and   risk   mitigation   of   renewable   energy   project   financing  with  the  support  of  USAID  in  the  course  of  2013  (cf.  USAID  2013).  In  collaboration  with  USAID  and   KLH,   Bank   Indonesia   also   developed   Green   Lending   Model   Guidelines   for   Mini   Hydro   Power   Plant   Projects,   which  were  shared  with  banks  nationwide  in  2013.  The  Guidelines  are  voluntary  and  shall  support  banks  in   developing  new  lending  practices.  Also  in  2013,  Bank  Indonesia  carried  out  a  comprehensive  research  project   on   green   banking   together   with   the   German   Development   Institute,   comprising   surveys   in   the   banking   sectors   on   banks’   interest   in   developing   a   green   lending   business   as   well   as   corporate   surveys   to   investigate   the  potential  corporate  demand  for  green  credit  (cf.  Volz  et  al.  2015).  The  findings  from  the  banking  survey,   some   of   which   will   be   discussed   in   Section   4.4,   were   presented   and   discussed   with   financial   industry   representatives  and  government  officials  at  a  large  workshop  at  Bank  Indonesia  in  April  2013.  The  research   team’s  recommendation  for  introducing  a  three-­‐phased  green  banking  framework  in  Indonesia  accompanied   by  capacity  building  measures  is  summarized  in  Annex  1.   Bank  Indonesia  (and  later  OJK)  has  also  been  an  active  participant  in  the  Sustainable  Banking  Network,  an   informal  group  of  bank  regulators  and  banking  associations  that  was  launched  by  the  International  Finance   Corporation  (IFC)  in  September  2012.  The  Network  has  been  used  to  learn  and  adapt  from  the  practices  of   other  countries  and  for  a  cross-­‐fertilization  of  ideas.   To   improve   access   to   finance,   Bank   Indonesia   introduced   two   regulations   (No.14/26/PBI/2012   and   No.14/22/PBI/2012)  requiring  banks  to  increase  productive  loans  and  loan  access  for  SMEs.  As  a  consequence,   since  the  beginning  of  2013  Indonesian  banks  are  required  to  give  20%  of  total  loans  to  SMEs.   With   the   start   of   2014,   OJK,   the   financial   services   authority   that   was   created   in   2013,   took   over   bank   regulation   and   supervision   from   Bank   Indonesia.   As   the   regulatory   authority   for   banks,   non-­‐bank   financial   institutions   and   capital   markets,   OJK   has   since   followed   up   on   Bank   Indonesia’s   green   banking   activities   and   broadened  the  focus  to  include  all  financial  services.  In  continuation  of  Bank  Indonesia’s  collaboration  with   KLH   in   the   area   of   green   banking,   in   May   2014,   OJK   and   KLH   signed   an   MOU   on   Improving   the   Roles   of   Financial   Services   Institutions   in   Environmental   Protection   and   Management   by   Developing   Sustainable   Financial   Services(KLH   and   OJK   2014).   At   the   occasion   of   signing   the   MOU,   the   Minister   of   Environment   emphasized   that   OJK   is   in   “a   strategic   position   to   regulate   [the]   economy   through   policy   on   credit   channelling/financing   that   is   environmentally-­‐friendly   and   [to]   stimulate   [...]   other   non-­‐bank   financial   services   entities   with   environmental   viewpoint   to   emerge,   such   as   stock,   insurance   and   other   financial   services”   (ibid.).   Likewise,   the   Chairman   of   the   OJK   Board   of   Commissioners   highlighted   “the   importance   of   improving   the   roles   of   financial   services   institutions   in   environmental   protection   and   management   by   developing  sustainable  financial  services”  (ibid.).     Main  goals  of  OJK-­‐KLH  MOU  on  Improving  the  Roles  of  Financial  Services  Institutions  in  Environmental   Protection  and  Management  by  Developing  Sustainable  Financial  Services   1. Harmonization  of  financial  services  policy  with  environmental  policy;   2. Harmonization  of  environmental  policy  with  financial  services  policy;   3. Use  of  environmental  data  and  information  for  developing  sustainable  financial  services;     4. Research  to  draft  policy  concept  for  sustainable  finance;  and     5. Development  of  environmental  competency  in  the  financial  services  sector     Based  on:  KLH  and  OJK  (2014).                                                                                                                                             17  The   workshops   funded   by   USAID   focused   on   the   review   of   renewable   energy   proposals,   especially   proposals   for   1-­‐10   MW   mini-­‐hydro   projects.   UNEP  Inquiry/  IFC/  AsRIA   23   Sustainable  Financing  in  Indonesia       Following   up   on   one   of   the   recommendations   from   the   green   banking   research   project   with   the   German   Development   Institute   in   2013,   OJK,   BAPPENAS   and   GIZ   commissioned   a   study   to   develop   an   operational   definition   of   sustainable   finance   that   could   be   applied   across   the   Indonesian   financial   system   as   the   basis   of   an   envisaged   sustainable   finance   framework   (cf.   Bromund   2014).   Meanwhile,   six   further   capacity   building   workshops   were   organized   with   KLH   in   2014,   two   of   which   were   conducted   in   collaboration   with   USAID   and   two   together   with   GIZ   and   BAPPENAS   (GIZ,   BAPPENAS   and   OJK   2014).   OJK   also   worked   with   IFC   and   USAID   on   a   Clean   Energy   Handbook   for   Financial   Service   Institutions,   which   was   published   in   February   2015   (OJK   2015).   The   Handbook   comprises   lending   manuals   of   five   types   of   renewable   energy   investments:   mini   hydro,   biogas,  biomass,  photovoltaic  and  wind.   In   August   2014,   OJK   launched   a   Working   Group   for   Improving   the   Roles   of   Financial   Services   Institutions   in   Environment  Protection  and  Management  by  Developing  Sustainable  Financial  Services  for  the  period  2014-­‐2019   (cf.   OJK   2014a).   Based   on   the   inputs   of   the   working   group   and   the   previous   research   findings   and   recommendations,   OJK   published   its   Roadmap   for   Sustainable   Finance   in   Indonesia   2015-­‐2019   in   December   2014  (OJK  2014b).18  The  main  elements  of  the  Roadmap  are  outlined  in  the  following  section.   At  the  start  of  2015,  OJK  is  developing  a  sustainable  finance  micro-­‐site  on  the  OJK  website.  This  is  intended   as   an   information   hub   on   all   matters   relating   to   sustainable   finance   in   Indonesia,   including   relevant   publications  and  information  on  OJK  initiatives.  OJK  has  also  started  discussing  details  of  the   Roadmap  with   relevant   stakeholders   and   invited   domestic   and   international   partners   to   provide   support   in   developing   a   coherent  working  program  for  the  period  2015-­‐2019.   3.5 OJK’s  Roadmap  for  Sustainable  Finance   The  Roadmap  for  Sustainable  Finance  lays  down  a  “detailed  work  plan  on  the  sustainable  finance  program  for   the  financial  service  industry”  (OJK  2014b:  15).  It  specifies  “the  measures  and  recommendations  that  need  to   be   adopted   in   the   form   of   an   integrated   work   plan   involving   all   financial   service   institutions”   (ibid.).   The   Roadmap  is  intended  to  become  an  integral  part  of  OJK’s   Master  Plan  for  Indonesia’s  Financial  Service  Sector   (MPSJKI).   Drawing   on   Bromund   (2014),   the   Roadmap   defines   sustainable   finance   as   “comprehensive   support   from   the   financial   service   industry   to   achieve   sustainable   development   result[ing]   from   a   harmonious   relationship   between   economic,   social   and   environmental   interests”   (OJK   2014b:   16).   It   describes   sustainable   finance   along  four  dimensions  (OJK  2014b:  16):   1. “Achieve  industry,  social  and  economic  superiority  in  order  to  address  the  threats  of  global  warming   and  mitigate  other  environmental  and  social  issues;     2. Aims  to  encourage  the  shifting  of  the  target  towards  a  competitive  low  carbon  economy;     3. Strategically   promoting   environmentally   friendly   investment   in   various   business   /   economic   sectors;   and     4. Supporting   the   principles   of   development   in   Indonesia   as   stated   in   the   RPJM,   namely   the   4P   (pro-­‐ growth,  pro-­‐jobs,  pro-­‐poor  and  pro-­‐environment).”   Going  forward,  it  will  be  important  to  make  this  definition  of  sustainable  finance  operational  so  that  financial   institutions  can  clearly  classify  whether  an  asset  is  deemed  sustainable  or  not.19  An  operational  definition  of   sustainable  finance  is  the  precondition  for  any  sort  of  sustainable  finance  incentive  scheme  or  regulation.   The  goals  of  the  OJK’s  sustainable  finance  program  are  threefold  (OJK  2014b:  16-­‐17):   1. To   improve   the   resilience   and   competitiveness   of   financial   service   institutions   (FSIs)   and   enable   them   to   grow   and   develop   in   a   sustainable   manner   through   improved   risk   management   and   an   ability  to  innovate  and  produce  environmentally  friendly  products  and  services.                                                                                                                                           18  OJK  received  support  in  developing  the  Roadmap  from  IFC,  GIZ  and  USAID.   19  For  a  concrete  proposal,  see  Volz  et  al.  (2015).   UNEP  Inquiry/  IFC/  AsRIA   24   Sustainable  Financing  in  Indonesia       2. To  unleash  financing  resources  that  will  be  required  to  achieve  Indonesia’s  pro-­‐growth,  pro-­‐job,  pro-­‐ poor  and  pro-­‐environment  developmental  goals  as  put  forward  in  the  RPJP  and  RPJM.   3. To  contribute  to  the  national  commitments  regarding  climate  change  mitigation  and  adaptation  and   support  the  transition  toward  a  competitive  low  carbon  economy.   To  achieve  these  goals,  the  Roadmap  puts  forward  four  principles  of  sustainable  finance  (OJK  2014b:  17-­‐18):   1. “Risk   Management   Principle   which   integrates   aspects   of   environmental   and   social   protection   in   FSI’s   risk   management   to   avoid,   mitigate   and   minimize   the   negative   impacts   that   may   arise   and   promote  increased  value  in  the  FSI’s  financing  and  operational  activities.   2. Sustainable   Priority   Economic   Sector   Development   Principle   that   is   inclusive   by   increasing   financing   activities   primarily   in   the   industry,   energy,   agriculture   (in   the   broadest   sense),   infrastructure   and   MSME   sectors   and   at   the   same   time   striking   a   balance   between   the   economic,   environmental   and   social   aspects;   and   provides   financial   services   to   the   community   who   has   limited   or  no  access  to  financial  services  in  the  formal  sector.   3. Environmental   and   Social   Governance   and   Reporting   Principle   by   implementing   robust   and   transparent   environmental   and   social   governance   practices   in   the   Financial   Service   Institution’s   operational   activities,   as   well   as   ensuring   that   the   same   environmental   and   social   governance   practices   are   implemented   by   the   FSI’s   clients;   and   periodically   reports   the   progress   of   FSIs   in   implementing  the  principles  of  sustainable  finance  to  the  public.   4. Capacity   Enhancement   and   Collaborative   Partnership   Principle   by   developing   human   resource,   information   technology   and   the   operational   capacity   of   each   relevant   LSI   in   implementing   the   principles   of   sustainable   finance;   and   establishes   cooperation   between   the   FSIs,   regulator,   government   and   leverages   on   the   partnership   with   domestic   and   international   institutions   to   advance  progress  in  the  area  of  sustainable  finance.”   In  the  Roadmap,  OJK  envisages  strategic  activities  aimed  at  increasing  the  supply  of  environmentally  friendly   financing,   increasing   the   demand   for   environmentally   friendly   financing   products,   and   developing   the   oversight   and   coordination   with   other   authorities   for   implementing   the   sustainable   finance   agenda.   The   Roadmap’s  implementation  plan  presented  in  Annex  2  comprises  no  less  than  19  activities  that  are  envisaged   for  the  period  2015-­‐2024,  ranging  from  the  introduction  of  new  regulatory  provisions  relating  to  sustainable   finance;   refining   policies   for   risk   management   to   include   environmental   and   social   aspects;   developing   prudential,   fiscal   and   non-­‐fiscal   incentives   for   financial   institutions   to   enhance   sustainable   finance;   developing   green   lending   models   for   priority   sectors;   demanding   mandatory   sustainability   reports   from   financial  institutions;  introducing  sustainable  finance  awards;  to  fostering  the  development  of  green  product   both  for  banking  and  nonbanking  industries.  A  graphical  overview  of  the  goals  and  activities  envisaged  in  the   Roadmap  is  presented  in  Figure  11.   While   the   details   of   the   foreseen   activities   are   (maybe   necessarily)   quite   general   at   the   current   stage   and   OJK   still   needs   to   flesh   out   the   particulars   of   the   envisaged   sustainable   finance   regulation,   the   Roadmap   provides  the  starting  point  for  an  ambitious  process  that  could  significantly  contribute  to  bringing  about  the   much-­‐needed   green   transformation   of   the   Indonesian   economy.   It   puts   forward   a   bold   strategy   to   raise   awareness  in  the  financial  sector  of  the  need  to  incorporate  environmental  and  social  risk  considerations  in   lending   and   investment   decisions   and   to   gradually   build   up   the   capacities   in   the   financial   industry   needed   to   develop  sustainable  financing  practices.     As   discussed   in   Section   4.1,   for   the   time   being   only   a   small   fraction   of   total   financing   is   channelled   into   sustainable  investments.  If  OJK  follows  up  on  the  Roadmap’s   implementation   plan,   this   could   result   not   only   in   a   fundamental   reshaping   of   Indonesia’s   financial   sector   but   also   a   much-­‐needed   boost   in   sustainable   investment.   To   make   the   Roadmap   and   the   sustainable   financing   program   a   success,   it   will   be   crucial   to   address   the   most   pertinent   bottlenecks   to   sustainable   lending   and   investment.   The   following   section   attempts  to  identify  these  bottlenecks,  including  in  the  real  economy,  and  discuss  initiatives  and  incentives   that  could  help  to  foster  sustainable  lending  and  investment.   UNEP  Inquiry/  IFC/  AsRIA   25   Sustainable  Financing  in  Indonesia       Figure  11:  Strategic  activities  to  implement  the  Roadmap     Source:  OJK  (2014b:  21).   3.6 Barriers  to  Sustainable  Finance  in  Indonesia  and  Recent  Developments   Critical   ‘real   economy’   priorities   for   attracting   green   finance   to   Indonesia   include:   enforcing   existing   environmental   regulation;   improving   processes   for   licensing,   permitting   and   negotiating   power   purchase   agreements   for   renewables;   improving   the   state   of   the   energy   grid;   and   phasing   out   fossil   fuel   subsidies.   However,  there  are  also  important  barriers  in  the  financial  system  which  need  to  be  addressed.   Banking   The  share  of  green  credits  in  banks’  portfolios  is  negligible  thus  far,  and  for  the  time  being,  sustainability  is   still   mostly   a   concern   for   corporate   social   responsibility   departments.   A   non-­‐published   survey   among   14   Indonesian  financial  institutions  (including  NBFI)  carried  out  by  PWC  and  IFC  in  2012  posed  the  question  of   whether  there  is  “a  consensus  among  financial  institutions/commercial  banks  in  your  country  that  there  is  a   need   for   higher   environmental   and   social   standards   in   lending/investment?”   The   results   were   very   clear:   not   a  single  respondent  answered  yes  (Figure  12).   Figure  12:  Is  there  a  consensus  among  financial  institutions/commercial  banks  in  your  country  that  there  is  a  need  for   higher  environmental  and  social  standards  in  lending/investment?   Question  not   answered   17%   No     83%     UNEP  Inquiry/  IFC/  AsRIA   26   Sustainable  Financing  in  Indonesia       Source:  PWC  and  IFC  (2012).     Sustainability   is   only   slowly   gaining   traction   in   the   Indonesian   banking   sector,   but   awareness   is   rising   not   least   due   to   Bank   Indonesia’s   and   OJK’s   efforts   in   promoting   sustainable   finance.   In   December   2005,   largely   state-­‐owned   PT   Bank   Negara   Indonesia   (BNI)   became   the   first   Indonesian   signatory   of   the   UNEP   FI   Statement  of  Commitment.  The  only  other  Indonesian  member  of  UNEP  FI  is  regional  government-­‐owned  PT   Bank   Jabar   Banten   (BJB),   which   joined   in   December   2011.   No   Indonesian   bank   has   thus   far   signed   the   Equator  Principles.  Under  the  slogan  ‘BNI  go  green’,  BNI  has  developed  a  comprehensive  CSR  program  (cf.   Bromund   2014).   BNI   has   also   published   an   annual   Sustainability   Report   since   2009.   In   2012   and   2013,   BNI   was   awarded  the  Sustainable  Business  Award  Indonesia  in  the  category  Banking  &  Finance.20   An  interesting  example  of  green  banking  practice  of  a  bank  operating  in  Indonesia  is  Bank  Asia  Ltd.,  a  bank   that   is   publicly   listed   in   Bangladesh,   where   Bank   Bangladesh,   the   country’s   central   bank,   introduced   a   comprehensive  green  banking  policy  already  in  2011.  On  its  website,  Bank  Asia  declares  its  goal  to  be  a  “bank   where  every  decision  will  be  taken  with  both  financial  and  environmental  considerations  in  mind.”21  To  this   end,   Bank   Asia   has   circulated   its   “Green   Banking   Policy   Guidelines   and   Green   Office   Guide   ...   to   all   ...   employees   for   creating   awareness   on   Green   Banking   activities   &   providing   instructions   about   conserving   energy,  water,  saving  paper,  etc.”   Several   international   development   agencies   have   tried   to   establish   partnerships   and   green   credit   facilities   with   Indonesian   banks.   The   interest   among   Indonesian   banks   has   been   rather   cautious.   Examples   of   past   and  present  credit  facilities  include  a  soft-­‐loan  program  for  Pollution  Abatement  Equipment  that  the  Japan   Bank   for   International   Cooperation   had   with   BNI;   KfW’s   Industrial   Efficiency   and   Pollution   Control   refinancing  line  over  IDR10  billion  with  BNI  and  government-­‐owned  Eximbank  (also  known  as  the  Indonesian   Export   Financing   Agency);   and   two   credit   facilities   (over   US$100   million   each)   for   ‘Renewable   and   Energy   Efficiency   Projects’   that   Agence   Française   Développement   (AFD)   arranged   with   state-­‐owned   PT   Bank   Mandiri,  Indonesia’s  biggest  bank  by  assets.  Where  an  agreement  to  establish  a  green  credit  line  with  a  local   partner   bank   could   be   reached,   disbursement   of   credit   often   proved   difficult.   For   example,   the   Asian   Development   Bank   developed   a   US$30   million   Energy   Efficiency   Project   Finance   Program   together   with   Eximbank   in   2011—the   first   loan   under   this   program   was   not   released   until   2014   (Sipahutar   2014).   A   major   problem  reducing  the  attractiveness  of  such  schemes  is  apparently  that  both  lender  and  debtor  usually  have   to   comply   with   comprehensive   formal   requirements   in   the   credit   approval   process   (Volz  et   al.   2015).   For   the   Energy   Efficiency   Project   Finance   Program,   Eximbank   has   been   requested   by   the   ADB   to   establish   an   environmental  and  social  management  system,  a  requirement  many  Indonesian  banks  would  rather  avoid.   In  2013,  Bank  Indonesia  and  the  German  Development  Institute  carried  out  a  comprehensive  green  banking   survey   among   Indonesia’s   commercial   banks   (DIE-­‐BI   green   banking   survey).22  68   banks   or   56.7%   of   all   Indonesian   commercial   banks   returned   a   completed   questionnaire.   The   survey   was   complemeted   by   semi-­‐ structured   qualitative   interviews   with   the   nine   largest   Indonesian   banks,   two   regional   banks   and   three   Sharia   banks.   The   findings   shed   light   on   Indonesian   banks’   views   on   green   finance   and   the   bottlenecks   to   enhancing  green  lending.   While  a  majority  (49/68)  of  banks  generally  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   (Figure   13a).   26   banks   considered   green   finance   moderately   promising   and   17   banks   found   it   a   bit  promising.  69%  of  the  responding  banks  said  they  plan  to  expand  their  activities  in  green  finance  (Figure   13.b).  However,  only  4%  consider  this  a  priority;  19%  plan  to  increase  green  lending  moderately  and  46%  only   slightly.                                                                                                                                           20  http://www.bni.co.id/en-­‐us/investorrelations/financialperformance/sustainabilityreport.aspx   21  http://www.bankasia-­‐bd.com/home/green_banking   22  For  the  full  survey  results  see  Volz  et  al.  (2015).   UNEP  Inquiry/  IFC/  AsRIA   27   Sustainable  Financing  in  Indonesia       The  low  level  of  green  lending  discussed  before  is  reflected  in  banks’  organizational  structures:  94%  of  the   responding   banks   have   no   unit   responsible   for   green   finance   (Figure   13c).   Furthermore,   the   availability   of   appropriately  qualified  and  experienced  staff  with  regard  to  environmental  assessments  of  credits  appears   to  be  a  major  problem:  81%  of  the  responding  banks  said  that  qualified  staff  is  scarce  or  very  scarce  (Figure   13d).  No  responding  bank  percieved  the  availibility  of  qualified  and  experienced  staff  as  good  or  even  very   good.   Banks   were   also   asked   to   what   extent   environmental   risks   are   considered   in   credit   decisions,   if   at   all.   Mirroring   the   results   for   a   lack   of   staff   experienced   in   environmental   risk   assessment,   77%   of   responding   banks   admitted   they   lacked   the   necessary   tools   to   assess   environmental   credits   risks.   Most   of   the   interviewed   banks   also   stated   that   they   lack   in-­‐house   tools   to   assess   environmental   risk.   The   standard   practice  for  banks  is  simply  to  confirm  the  existence  of  AMDAL  and  UKL-­‐UPR  licenses  or  check  the  PROPER   rating  if  the  firm  in  question  has  been  rated.   Even   if   environmental   risk   assessment   appears   to   be   of   little   importance   in   individual   credit   decisions,   banks   stated  that  they  consider  environmental  risks  when  it  comes  to  their  overall  lending  portfolio.  When  asked   to   what   extent   environmental   or   climate   change   risks   impacted   on   their   portfolio   diversification   strategy,   35%  of  responding  banks  stated  that  they  consider  it  to  a  high  extent,  and  another  34%  said  they  consider  it   to   a   medium   extent   (Figure   13e).   However,   none   of   the   responding   banks   considered   the   impact   of   environmental   or   climate   change   risks   to   a   very   high   extent;   18%   considered   it   to   a   low   extent   and   7%   completely  ignored  it  in  their  portfolio  diversification  strategy.  From  the  interviews,  it  did  not  become  clear   how  exactly  environmental  or  climate  change  risk  is  incorporated  into  portfolio  diversification  strategies  and   to  what  extent  these  affect  the  overall  sectoral  configuration  of  lending  portfolios.   Interestingly,   when   banks   were   asked   for   the   reasons   why   their   green   lending   exposure   was   so   low,   only   four  banks  or  6%  or  responding  banks  stated  that  green  investments  were  more  risky  (Figure  14a).  This  is  a   remarkably  low  figure,  given  that  green  investments  are  usually  associated  with  higher  risk  related  to  long   loan   tenor,   as   well   as   risk   related   to   technology   and   political   uncertainty.   The   small   number   of   Indonesian   banks  that  selected  high  risk  in  the  bank  survey  as  a  major  obstacle  to  financing  green  projects  may  be  due   to   the   fact   that   only   few   Indonesian   banks   actually   have   experience   in   green   lending.   Indeed,   46%   of   the   responding  banks  indicated  that  they  do  not  have  enough  experience  in  financing  green  projects  and  thus   refrain   from   doing   so.   A   lack   of   experience   can   result   in   higher   administrative   costs   for   the   assessment   of   green   project   proposals,   in   comparison   to   conventional   projects,   as   was   highlighted   in   the   interview   sessions.  In  the  interviews,  when  explicitly  asked  about  different  forms  of  lending  risk,  most  banks  actually   expressed   the   view   that   green   loans   were   more   risky,   principally   because   tenors   were   longer.   With   those   lenders   who   possessed   some   experience   in   financing   renewable   energy   projects,   the   perception   of   higher   risk   was   a   combination   of   longer   loan   tenors   and   lack   of   competencies   to   assess   risk   for   novel,   green   technologies.     It   is   also   interesting   that   41%   of   responding   banks   indicated   that   there   is   a   lack   of   demand   for   credits   for   green   projects   among   their   customers.   This   underscores   the   limits   to   green   bank   lending   posed   by   an   insufficient   pipeline   of   investable   green   projects,   a   problem   also   highlighted   by   several   interviewees.   Only   one   bank   stated   that   financing   of   green   projects   is   not   profitable   enough.   By   and   large,   it   appears   that   a   number   of   factors,   including   risk   related   to   longer   tenors   and   high   transaction   costs   due   to   lack   of   green   lending  experience  and  small  volumes,  constitute  major  barriers  to  green  lending.   The  survey  and  interview  finding  that  banks’  lack  of  capacities  in  processing  and  assessing  green  credit  is  a   severe   hindrance   for   the   development   of   green   lending   is   also   reflected   in   the   answers   to   the   survey   question   “What   kind   of   support   from   the   banking   supervision   authority   would   help   your   bank   to   engage   more  in  Green  Finance?”  (Figure  14b):  79%  and  75%  of  responding  banks  called  for  more  capacity  building  and   technical  assistance,  respectively;  84%  demanded  better  access  to  information.       UNEP  Inquiry/  IFC/  AsRIA   28   Sustainable  Financing  in  Indonesia       Figure  13:  Results  from  DIE-­‐BI  green  banking  survey,  2013  (answers  in  %)   (a)  Do  you  consider  green  finance  as     (b)  Do  you  plan  to  extend  your  activities   a  promising  business  area?    in  green  finance?   46   46   31   30   19   4   13   11   A  bit   Moderately   Very   N/A   promising   promising   promising         (d)  How  would  you  describe  the  availability  of   appropriately  qualified  and  experienced  staff  in  the   (c)  Does  your  bank  have  a  unit  responsible     banking  sector  with  regard  to  environmental   for  Green  Finance?   assessments  of  credits?   43   Yes   38   6%   18   No   1   94%   Sufficient   Scarce   Very   N/A   Yes   No   scarce       (e)  To  what  extent  do  environmental     (f)  Do  you  think  that  a  regulatory  framework  for   or  climate  change  risks  impact  on  your  portfolio   Green  Finance  would  be  conducive     diversification  strategy?   to  foster  green  investments?   35   34   44   26   18   18   12   7   6   To  a  high   To  a   To  a  low   Not  at  all   N/A   To  a   To  a   To  a  low   Not  at  all   extent   medium   extent   significant   medium   extent   extent   extent   extent       Source:  Volz  et  al.  (2015).   UNEP  Inquiry/  IFC/  AsRIA   29   Sustainable  Financing  in  Indonesia       Overall,   it   seems   that   while   there   is   a   general   interest   in   developing   green   lending   business,   most   banks,   especially   the   large   ones,   feel   little   urgency   in   doing   so   given   that   they   have   been   able   to   generate   high   profit   margins   with   their   conventional   lending   business.   Indonesia’s   banks   have   a   “generally   conservative   approach   to   business”   (PWC   2012:   59),   with   lending   being   mostly   short-­‐   and   medium-­‐term. 23  As   a   consequence,   there   has   been   little   effort   thus   far   to   develop   the   “seemingly   less   lucrative   green   finance   market”   (Volz   et   al.   2015:   118).   It   should   be   pointed   out,   however,   that   the   problems   holding   back   the   financing   of   many   green   projects   appear   very   much   the   same   as   those   restraining   infrastructure   financing   more   generally:   “For   the   banks,   the   problem   is   that   infrastructure   projects   typically   require   a   long   gestation   period,   and   it   is   often   more   than   a   decade   before   profits   materialize.   That   length   of   time   is   beyond   the   comfort  zone  of  most  Indonesian  banks,  whose  loan  officers  expect  to  evaluate  credit  requests  based  on  a   faster  turnaround”  (PWC  2012:  59).   Interestingly,   questioned   on   their   view   on   a   prospective   regulatory   framework   for   green   finance,   56%   of   responding  banks  showed  a  positive  attitude,  saying  that  a  regulatory  framework  for  green  finance  would   be   conducive   to   foster   green   investments   “to   a   medium”   or   “significant   extent”   (Figure   13f).   18%   thought   that  a  regulatory  framework  would  not  be  conducive  at  all  to  foster  green  finance  and  26%  believed  it  would   make   little   difference.   In   interviews,   bank   officials   generally   expressed   the   view   that   binding   regulation   making  environmental  risk  analysis  mandatory  would  help  to  create  a  level  playing  field,  which  would  also   allow  banks  to  reject  profitable  yet  environmentally  harmful  projects  without  fear  that  other  banks  would   finance  them  in  their  stead.   Figure  14:  Results  from  DIE-­‐BI  green  banking  survey,  2013  (answers  in  %)   (a)  Why  does  your  bank  not  extend  more  credits  to  finance  green  projects?   [multiple  responses  possible]     41   46   34   15   6   7   1       (b)  What  kind  of  support  from  the  banking  supervision  authority  would  help  your   bank  to  engage  more  in  Green  Finance?    [multiple  responses  possible]     79   84   75   34   10   Capacity   Technical   Recognition   Access  to   Others   building   assistance   awards   information     Source:  Volz  et  al.  (2015).                                                                                                                                           23  Indonesian  banks  usually  extend  only  short-­‐term  credits  that  are  commonly  rolled-­‐over  with  renegotiated  interest  rates.  As  pointed  out  by   PWC  (2012:  59),  “[o]nly  select  clients  receive  repayment  terms  that  extend  into  multiple  years,  which  means  that  it  is  difficult  to  use  bank   financing  to  fund  infrastructure  development.”   UNEP  Inquiry/  IFC/  AsRIA   30   Sustainable  Financing  in  Indonesia         Given   their   commitment   to   ethical   and   social   business   practices,   one   may   expect   Islamic   banks   to   put   a   greater  emphasis  on  ESG  consideration  than  conventional  banks,  but  interestingly  the  results  of  the  DIE-­‐BI   green  banking  survey  and  interviews  give  no  indication  that  Islamic  banks  currently  act  any  differently  from   conventional   commercial   banks   when   it   comes   to   sustainability   issues.   This   may   be   due   to   the   generally   low   level   of   awareness   of   sustainability   challenges   in   the   Indonesian   society   at   large.   This   may   also   be   an   explanation   why   the   lending   practices   of   the   BPDs,   the   regional   banks   which   are   owned   by   regional   governments  who  could  request  them  to  apply  higher  sustainability  standards  in  their  local  lending  business,   do   not   seem   to   differ   much   from   those   of   privately   owned   commercial   banks.24  Given   Indonesia’s   ambitious   sustainability  goals,  over  time  the  central  and  regional  authorities  may  increasingly  demand  publicly  owned   financial  institutions  to  put  greater  emphasis  on  lending  for  sustainable  investment.   In  an  analysis  of  policy  and  regulatory  barriers  to  sustainable  investment  in  Indonesia,  ASrIA  (2015:  9)  raised   concerns   that   an   “[a]doption   of   Basel   III   international   banking   standards   through   forthcoming   macroprudential   regulation   will   affect   banks’   capital   adequacy   requirements   and   banks’   liquidity   stores,   and   is  likely  to  discourage  future  climate  finance  flows  towards  long-­‐term  debt  for  project  finance.”  However,  it   should  be  pointed  out  that  liquidity  has  been  persistently  high,  especially  among  the  large  banks.  But  Basel   III   may   indeed   limit   the   incentive   for   banks   to   develop   long-­‐term   lending   models,   which   would   be   crucial   for   sustainable  infrastructure  and  energy  financing.     To  foster  long-­‐term  lending,  ASrIA  points  to  the  need  to  develop  long-­‐term  wholesale-­‐funding  markets.  At   the   moment,   Indonesian   banks   depend   almost   entirely   on   customer   deposits,   which   accounted   for   91.17%   of   total  funding  in  2012;  issued  securities  accounted  for  only  1.19%  of  bank’s  total  funding  (Alvarez  et  al.  2013:  4).   Since  deposits  are  mostly  short-­‐term,  maturity  mismatches  would  arise  if  Indonesian  banks  were  to  finance   long-­‐term   projects   with   their   current   funding   structure.   To   ensure   that   long-­‐term   assets   are   funded   with   long-­‐term   liabilities,   banks   will   need   to   develop   long-­‐term   refinancing   sources.   The   development   of   corporate   bond   markets—and   sukuk   bond   markets   for   Islamic   finance—will   be   very   important   in   this   respect.   Capital  Markets   To   investigate   the   reasons   behind   the   currently   low   share   of   investment   into   sustainable   assets   in   the   Indonesian   capital   markets,   interviews   were   conducted   in   January   2015   with   representatives   of   mutual   funds,   pension   funds,   insurance   companies   and   a   number   of   financial   industry   associations.   Except   for   general   insurance   companies,   a   consistent   picture   emerged   across   the   different   segments   of   the   industry:   For  the  time  being,  hardly  any  institutional  investors  in  Indonesia  integrate  ESG  factors  into  the  investment   decision-­‐making   process.   In   line   with   this,   there   seem   to   be   very   few   professional   investment   staff   in   the   industry   that   have   been   trained   in   ESG   issues.   To   date,   there   are   no   disclosure   requirements   for   NBFIs   in   Indonesia   that   address   environmental   or   long-­‐term   systemic   risk   factors   whatsoever.   At   the   same   time,   there   are   no   regulatory   hurdles   that   would   hinder   investment   into   sustainable   assets.   For   insurance   or   reinsurance   companies,   for   instance,   the   required   Risk-­‐Based   Capital   (RBC),   Indonesia’s   insurer   solvency   regime,  poses  no  constraints  on  long-­‐term  investment.   Although  there  seems  to  be  a  broad  agreement  across  the  investment  community  that  Indonesia’s  exposure   to   polluting   and   environmentally   damaging   investments   could   pose   a   systemic   risk   to   the   financial   system   and  long-­‐term  growth  of  the  economy,  this  realization  does  not  affect  financial  firms’  investment  decisions.   Also,   the   level   of   awareness   on   the   risk   of   stranded   assets   and   the   broader   divestment   movement   that   is                                                                                                                                           24  While  BPDs  have  high  market  shares  in  their  respective  regions,  they  managed  only  8.9%  of  Indonesia’s  banking  assets  in  2014.  The  same   year,   only   33%   of   BPD   lending   was   directed   to   the   corporate   sector,   with   a   focus   on   wholesale   and   retail   trade   financing,   followed   by   construction  and  agriculture  lending.   UNEP  Inquiry/  IFC/  AsRIA   31   Sustainable  Financing  in  Indonesia       growing  internationally  is  very  low  and  is  not  filtering  into  decision-­‐making.25  There  are  at  least  three  reasons   for   this   dissonance.   First,   because   investments   in   Indonesian   capital   markets   are   typically   short-­‐term   (between   one   and   two   years),   long-­‐term   risks   like   climate   change   are   considered   unlikely   to   have   an   immediate  impact  on  today’s  investments.  Second,  as  long  as  there  is  no  regulatory  requirement,  investors   are   unwilling   to   carry   out   voluntary   environmental   risk   analysis   as   part   of   the   investment   process   because   this  causes  additional  costs,  and  a  decision  to  put  off  projects  that  would  be  realized  otherwise  could  reduce   profits.   Indeed,   there   seems   to   be   a   widespread   concern   that   inclusion   of   ESG   criteria   could   worsen   fund   performance,   while   projects   rejected   because   of   ESG   concerns   would   be   still   realized   by   competitors.   It   is   hence  noteworthy  that  interviewees  consistently  suggested  that  OJK  should  make  screening  of  ESG  criteria   mandatory   to   create   a   level   playing   field.   Third,   Indonesian   capital   markets   have   very   few   “sustainable”   assets  for  institutional  investments.   An  interesting  exception  to  the  widespread  ignorance  of  ESG  criteria  is  PT  Indonesia  Infrastructure  Finance   (IIF),   which   is   a   specialized   infrastructure   investor   owned   by   the   Government   of   Indonesia   (through   PT   Sarana  Multi  Infrastruktur),  ADB,  IFC,  DEG  and  Sumitomo  Mitsui  Banking  Corporation.  Since  IFC  requires  all   of  its  clients  to  apply  Performance  Standards  on  Environmental  and  Social  Sustainability,  IIF  has  to  adhere  to   '8  Social  and  Environmental  Principles’  (Annex  3).  The  application  of  these  principles  has,  in  at  least  one  case,   caused  IIF  to  pull  out  of  a  project  that  was  then  financed  by  a  competitor.   A  further  interesting  exception  with  respect  to  the  analysis  of  environmental  and  climate  change-­‐related  risk   are   general   insurance   companies.   Over   the   last   years,   Indonesia   has   been   exposed   to   several   natural   disasters   that   are   commonly   associated   with   climate   change,   such   as   flooding   and   landslides.   Given   that   the   latter  have  an  immediate  effect  on  property  or  motor  vehicle  insurers  (the  two  most  important  types  of  non-­‐ life   insurance   in   Indonesia),   the   Association   of   Indonesian   General   Insurance   Companies   has   started   to   collect   data   on   claims   related   to   flooding   and   landslides   and   develop   risk   maps   accordingly.   These   risk   maps   are   shared   among   the   members,   who   adjust   their   risk   premia   accordingly.   Given   that   Indonesia   is   highly   vulnerable  to  the  effects  of  climate  change  (Yusuf  and  Francisco  2009;  World  Bank  and  GFDRR  2012;  World   Bank  2014),  it  would  be  reasonable  for  other  financial  institutions  to  also  consider  environmental  risk.26   Besides   financial   indicators,   good   corporate   governance   was   frequently   referred   to   as   a   major   factor   affecting   investment   decisions.   Adherence   to   environmental   legislation   was   widely   considered   an   important   element   of   good   corporate   governance,   and   some   interviewees   even   expressed   the   thought   that   corporations   that   take   into   account   environmental   and   social   considerations   may   over   the   long   run   outperform   competitors,   as   they   are   implementing   practices   that   may   sooner   or   later   become   mandatory   for   all   firms.   In   this   context,   is   noteworthy   that   in   January   2014   the   Indonesian   Stock   Exchange   (IDX)   introduced  new  corporate  governance  requirements  for  listed  companies  based  on  the   Indonesia  Corporate   Governance   Manual   that   OJK   published   together   with   the   IFC   in   the   same   month   (OJK   and   IFC   2014).   In   February   2014,   OJK,   supported   by   IFC,   launched   an   Indonesian   Corporate   Governance   Roadmap.   Moving   forward,  IDX  could  play  an  important  role  in  strengthening  ESG  practices  among  listed  companies  through   its  listing  requirements.27   Interestingly,   IDX   together   with   the   KEHATI   Biodiversity   Conservation   Trust   Fund,   recently   started   a   remarkable  experiment.  In  June  2009,  IDX  and  KEHATI  launched  a  Social  and  Responsible  Investment  (SRI)   index  comprising  25  companies  listed  at  IDX.  For  this  SRI-­‐KEHATI  index,  25  stocks  are  selected  based  on  both   negative   (excluded   sectors)   and   positive   (enhanced   social   and   environmental   management)   criteria   (cf.   Annex   4).   Even   though   KEHATI   has   described   the   SRI-­‐KEHATI   index   as   the   “first   Green   Index   in   ASEAN”,   the                                                                                                                                           25  The   fact   that   a   number   of   Indonesian   palm   oil   firms   have   been   affected   by   divestment   decisions   of   international   investors,   including   Norway’s  Sovereign  Wealth  Fund,  because  of  unsustainable  business  models  (see,  for  example,  Lang  2013;  Malone  2014)  is  not  widely  known   in  Indonesia.   26 There  are  indeed  examples  of  non-­‐insurance  financial  institutions  in  Indonesia  that  suffered  losses  from  environmental  disasters.  One  bank   was   faced   with   payment   defaults   during   the   big   Jakarta   flooding   in   2012   because   it   had   bought   a   large   portfolio   from   a   consumer   financing   firm  that  had  extended  credit  for  mopeds—  many  of  which  were  destroyed  during  the  flooding.   27  See  EIRIS  (2010)  on  the  role  of  stock  exchanges  can  play  in  improving  ESG  standards.   UNEP  Inquiry/  IFC/  AsRIA   32   Sustainable  Financing  in  Indonesia       criteria  for  “green”  are  rather  low.  Nonetheless,  for  Indonesia  this  is  the  first  financial  market  initiative  that   explicitly  incorporates  sustainability  considerations.     The  results  are  encouraging:   As  shown  in  Figure  15,   the   SRI-­‐KEHATI  index  has  consistently  outperformed  the   MSCI   Indonesia,   and   during   2013   its   performance   has   been   very   similar   to   the   Jakarta   Composite   Index.   In   September   2014,   PT   Indo   Premier   Investment   Management   launched   the   SRI   KEHATI-­‐ETF,   an   exchange-­‐ traded   fund   listed   on   IDX   that   tracks   the   SRI   KEHATI   index.   The   SRI   KEHATI-­‐ETF   is   possibly   the   first   sustainability-­‐themed  investment  product  in  Indonesia.   Figure  15:  SRI-­‐KEHATI,  Jakarta  Composite  Index  and  MSCI  Indonesia  (total  return)     Source:  IDX.   A   further   sustainability-­‐themed   investment   was   launched   in   December   2014.   Supported   by   a   partial   credit   guarantee   from   IFC,   PT   Ciputra   Residence,   a   residential   property   developer   who   has   committed   to   apply   IFC’s  green  building  standards,  issued  an  IDR500  billion  (around  US$40  million)  bond  at  the  IDX.  This  is  the   first   of   its   kind:   there   have   been   no   green   bond   issuances   before,   and   no   standards   or   ratings   for   green   bonds   have   been   developed   in   Indonesia   up   till   now.   The   Roadmap   Implementation   Plan   (cf.   Annex   2)   envisages   the   “[p]rovision   of   required   supports   [sic]   to   relevant   government   institution[s]   and   industry   practitioners  in  the  development  and  issuance  of  green  bonds.”   A  somewhat  unusual  yet  interesting  project  has  been  the  Mangrove  Rehabilitation  Program  by  KEHATI  and   the   Ministry   of   Finance.   The   20   banks   and   brokerage   institutions   that   acted   as   selling   agents   of   government   bond  ORI010  in  the  period  September  20  –  October  4,  2013  had  to  donate  a  share  of  the  selling  agent’s  fee  to   a  rehabilitation  project  for  mangrove  forests.  Besides  raising  IDR1.1  billion  (around  US$  100,000)  for  the  good   cause,   the   project   may   be   a   good   example   for   raising   awareness   that   investment   decisions   can   have   an   impact,  negative  as  well  as  positive.   These   are   only   tiny   steps   towards   greening   Indonesia’s   capital   markets.   Yet   market   participants   generally   agreed   that   there   was   potential   demand   for   sustainability-­‐themed   investments   including   green   infrastructure   bonds.   Also,   some   mutual   fund   managers   reported   growing   interest   among   institutional   investors  in  sustainable  investment  strategies.  One  large  asset  management  company  was  even  requested   by  several  institutional  investors  to  develop  an  ESG  strategy.  It  is  not  known  whether  these  demands  came   from   domestic   or   foreign   institutional   investors.   In   either   case,   such   customer   demands   may   well   cause   a   growing   number   of   NBFIs   to   consider   ESG   strategies.   Regulatory   requirements   concerning   ESG   disclosure   would  certainly  help  to  advance  sustainable  investment,  as  would  tax  incentives.28                                                                                                                                             28 After  the  Asian  crisis,  tax  discounts  on  coupon  and  capital  gains  were  one  of  the  instruments  to  generate  investor  interest  in  local  currency   bond  markets  among  mutual  fund  investors.   UNEP  Inquiry/  IFC/  AsRIA   33   Sustainable  Financing  in  Indonesia       Bureaucratic  and  Other  Hurdles   While   some   characteristics   of   Indonesia’s   financial   markets—like   the   lack   of   experience   and   capacity   regarding  ESG  risk  analysis  and  a  strong  focus  on  short-­‐term  lending  and  investment—are  certainly  holding   back   green   investments,   it   is   important   to   emphasize   that   green   investments,   including   investments   in   renewable   energy,   are   also   held   back   by   difficult   investment   conditions,   inconsistent   policies   and   cumbersome   permission   procedures. 29  Interviews   with   several   domestic   and   foreign   investors   and   developers  gave  a  uniform  picture  of  the  difficulties  of  developing  renewable  energy  projects.  The  lengthy   and  uncertain  permission  process  for  renewable  energy  facilities,  which  usually  take  several  years,  is  a  strong   disincentive   for   investors.   Getting   the   permission   in   most   cases   takes   much   longer   than   the   actual   construction   process.   Some   foreign   investors   also   complained   that   permissions   are   often   given   to   local   brokers   with   no   experience   in   project   development.   Moreover,   getting   a   power   purchase   agreement   for   capacities  larger  than  10  MW  from  Perusahaan  Listrik  Negara  (PLN),  Indonesia’s  government-­‐owned  energy   monopolist,   can   be   a   lengthy   procedure,   which   is   also   complicated   by   suboptimal   coordination   between   PLN,  the  Ministry  of  Energy  and  Mineral  Resources  and  other  (regional)  authorities  involved.     Although   there   is   a   huge   potential   for   investment   in   renewable   energy   and   foreign   investors   with   ample   liquidity  have  shown  a  strong  interest,  many  foreign  investors  complain  that  the  Indonesian  government  has   not  been  particularly  welcoming.  The  limits  on  foreign  ownership  in  power  plants  of  49%  for  capacities  below   10   MW   introduced   in   2014   has   reportedly   discouraged   investment   in   smaller   facilities,   while   the   risk   of   investing   in   sites   with   larger   capacities   is   very   high   due   to   unpredictable   licensing   and   permit   procedures.   Facilitating  investment  in  renewable  energy  sites  would  be  made  more  straightforward  by  providing  a  clear   framework   and   streamlined   licensing   procedures.   Recent   announcements   by   President   Widodo   to   “create   a   ‘one-­‐stop’   service   for   foreign   investors”   (Andhika   2014)   have   raised   hopes   among   foreign   investors,   including  those  interested  in  investing  in  sustainable  infrastructure  and  energy.  It  should  be  noted  that  real   asset   investments   are   needed   for   developing   tradable   assets   in   capital   markets.   Indeed,   a   portfolio   of   renewable  energy  assets  would  provide  opportunities  for  securitizing  cash  flows  and  providing  investment   opportunities  for  capital  investors.  Various  energy  companies  are  reportedly  working  in  this  direction  at  the   moment.                                                                                                                                               29  This  is  a  reflection  of  the  generally  difficult  investment  climate  in  Indonesia.  In  the  World  Bank’s  2015  report  on  Doing  Business  (which  is   not   without   criticism,   to   be   fair),   Indonesia   was   ranked   only   114   out   of   189   countries   (World   Bank   2015).   In   Transparency   International’s   Corruption  Perceptions  Index,  Indonesia  was  ranked  107  out  of  175  countries.   UNEP  Inquiry/  IFC/  AsRIA   34   Sustainable  Financing  in  Indonesia         4 Conclusions   To   set   Indonesia   on   a   path   of   sustainable,   low-­‐carbon   development,   it   will   be   crucial   that   environmental   and   social  risk  screening  becomes  an  integral  part  of  lending  and  investment  decisions  in  the  Indonesian  financial   sector.   Indonesia   has   an   economy   with   a   huge   growth   potential,   but   also   enormous   investment   needs   in   critical   infrastructure   and   environmentally   sensitive   areas   such   as   agriculture,   forestry,   energy,   mining   and   waste.  Indonesia  also  faces  social  challenges  in  eradicating  poverty  and  developing  an  equitable  society.   With   the   Roadmap   for   Sustainable   Finance   in   Indonesia,   OJK   has   put   forward   a   bold   and   visionary   strategy   to   develop   over   the   medium   term   a   financial   system   where   financial   firms   include   environmental   and   social   aspects  in  their  risk  management  and  where  lending  and  investment  decisions  take  into  account  ESG  criteria.   The   Roadmap   provides   the   starting   point   to   raise   awareness   and   gradually   build   up   the   capacities   in   the   financial   industry   needed   to   develop   sustainable   financing   practices.   Despite   being   at   an   early   stage,   the   Roadmap  is  unique  internationally  as  a  systematic  plan  grown  out  of  a  decade  of  development  of  sustainable   finance  in  Indonesia.  By  making  it  an  integral  part  of  its   Master  Plan  for  Indonesia’s  Financial  Service  Sector,   OJK  is  working  toward  the  goal  of  mainstreaming  sustainability  in  financing  and  investment.   While  a  majority  of  banks  generally  consider  green  finance  as  a  promising  business  area,  banks—especially   the  large  ones  which  currently  enjoy  very  high  profit  margins  with  their  conventional  business  models,  which   are   dominated   by   consumer-­‐lending—feel   little   urgency   in   developing   their   green   lending   capacities.   Building  on  its  efforts  to  increase  the  share  of  productive  loans  to  SMEs  in  total  bank  lending,  OJK  should   work  towards  developing  a  binding  regulatory  framework  for  green  finance  which  includes  the  compulsory   establishment   of   environmental   and   social   management   systems.30  As   discussed,   bank   officials   are   generally   positive   about   OJK’s   intention   of   making   environmental   risk   analysis   mandatory   as   this   would   help   to   create   a   level   playing   field   and   allow   them   to   reject   profitable   yet   environmentally   harmful   projects   without   fear   that  other  banks  would  finance  them  in  their  stead.  The  same  positive  attitude  prevails  in  capital  markets,   where   market   participants   seemed   generally   open   to   integrate   ESG   factors   into   the   investment   decision   making   process   as   long   as   everyone   else   is   obliged   to   do   the   same.   Regulatory   requirements   for   ESG   disclosure   would   be   an   important   means   to   advance   sustainable   investment.   In   this   context,   the   Indonesian   authorities   may   also   consider   the   merits   of   imposing   provisions   for   lenders’   environmental   liability   and   reforming  the  fiduciary  duties  of  NBFIs  (cf.  Richardson  2008;  UNEP  FI  2009).   There   are   further   measures   OJK   can   adopt   in   order   to   incentivize   certain   types   of   lending,   including   differentiated   reserve   requirements   with   lower   required   reserve   rates   on   privileged   green   assets   or   differentiated  capital  requirements  with  different  capital  adequacy  ratios  according  to  the  characteristics  of   the   banking   institute   and   the   type   of   lending   they   provide   (cf.   Volz   2014).   OJK   is   currently   discussing   to   progress  green  weightings  on  capital  requirements,  which  would  be  a  truly  innovative  decision  that  would   set   an   example   internationally.   Another   area   that   should   be   further   explored   by   Bank   Indonesia   is   the   inclusion   of   environmental   risk   analysis   in   its   macroprudential   policy   framework   (van   Tilburg   et   al.   2014;   Volz   2014).   Besides   regulatory   and   disclosure   requirements   for   environmental   and   social   risk   analysis,   the   Indonesian   authorities   may   also   provide   fiscal   incentives   to   the   financial   sector   to   stimulate   green   lending   and   investment.  However,  as  discussed  before,  thus  far,  the  large  Indonesian  banks  have  been  rather  reluctant   to  sign  up  to  subsidized  credit  lines  from  international  development  banks  and  agencies,  apparently  because   such   schemes   typically   entail   that   both   lender   and   debtor   comply   with   in   their   view   cumbersome   formal                                                                                                                                           30  On   the   establishment   of   environmental   and   social   management   systems   see,   for   instance:   http://firstforsustainability.org/risk-­‐ management/implementing-­‐ifc-­‐environmental-­‐and-­‐social-­‐requirements/establish-­‐and-­‐maintain-­‐an-­‐esms/ifc-­‐environmental-­‐and-­‐social-­‐ performance-­‐requirements/   UNEP  Inquiry/  IFC/  AsRIA   35   Sustainable  Financing  in  Indonesia       requirements   in   the   credit   approval   process.   Still,   subsidized   credit   lines   may   provide   some   incentive   for   smaller   banks   to   develop   their   green   lending   business,   but   any   such   scheme   should   be   linked   to   capacity   building  measures,  and  have  a  clearly  defined  runtime  and  criteria  for  success  and  failure.31  The  Ministry  of   Finance  could  also  create  tax  incentives  for  green  investments  such  as  tax  discounts  on  coupon  and  capital   gains   for   mutual   fund   investors   investing   in   green   bonds.   Green   fiscal   measures   can   also   be   employed   to   generate   interest   in   green   investments   among   corporates   and   households,   stimulating   demand   for   green   finance  from  the  real  economy.   Given  that  four  of  Indonesia’s  biggest  lenders  are  state-­‐owned  banks,  and  that  Indonesia  has  a  wide-­‐ranging   network   of   publicly   owned   regional   and   rural   banks,   the   central   and   regional   authorities   could   indeed   use   their   ownership   status   to   request   publicly   owned   financial   institutions   to   put   greater   emphasis   on   lending   for  productive  and  sustainable  investment.  However,  to  counter  the  danger  that  this  may  result  in  politicised   or   crony   lending   by   publicly   owned   financial   institutions,   it   will   be   crucial   to   strengthen   corporate   governance   of   these   institutions,   including   through   tighter   internal   and   external   auditing,   and   improved   accounting  practices  and  risk  management.32   One   major   challenge   for   developing   sustainable   finance   in   Indonesia   is   to   address   the   short-­‐termism   that   prevails   in   Indonesia’s   financial   markets.   The   practice   of   Indonesian   banks   to   extend   mostly   short-­‐term   credits   that   are   commonly   rolled-­‐over   with   renegotiated   interest   rates   makes   any   kind   of   long-­‐term   financing  of  sustainable  investment  difficult.  To  foster  long-­‐term  bank  lending,  Indonesia  needs  to  develop   local  long-­‐term  wholesale-­‐funding  markets  so  that  Indonesian  banks  can  reduce  their  reliance  on  customer   deposits  as  their  major  source  of  refinancing.  At  the  same  time,  the  further  development  of  Indonesia’s  local   currency   corporate   bond   market   with   longer-­‐term   debt   instruments   would   also   enable   investors   to   undertake   more   long-­‐term   investments.   A   longer   investment   horizon   would   likely   increase   investors’   awareness  of  ESG  risk  factors.   A   topic   that   deserves   further   analysis   is   the   role   that   Islamic   finance   may   play   in   aligning   the   Indonesian   financial   system   with   sustainable   development.   Since   the   outbreak   of   the   Global   Financial   Crisis   in   2008,   there   has   been   an   interesting   discussion   as   to   whether   Islamic   finance   may   offer   a   more   sustainable   alternative   to   the   Anglo-­‐Saxon   model   of   finance.33  As   pointed   out   by   Akhtar   (2007:   5),   “Islamic   finance   confines   itself   to   largely   socially   and   development   projects   and   institutions   are   not   permitted   to   invest   in   prohibited   or   socially   undesirable   investments.   Emphasis   on   ethical   issues   and   rigorous   self-­‐regulation   in   terms   of   Sharia   supervision   ensures   fair   play   and   justice   and   offers   superior   consumer   protection   model.   Furthermore  it  induces  higher  financial  discipline  and  places  stringent  ethical  standards  for  all  stakeholders   that   offers   a   strong   and   unique   model   of   governance.”   For   the   time   being,   the   share   of   Islamic   finance   in   Indonesia  is  very  small—Islamic  finance  constitutes  only  4.5%  of  total  banking  assets  as  of  September  2014   (Vizcaino   and   Suroyo   2014)—and   it   is   not   clear   that   Islamic   financial   institutions   in   Indonesia   consider   ESG   issues  besides  excluding  certain  sectors  like  alcohol,  tobacco  and  gambling.  As  discussed,  the  DIE-­‐BI  survey   and  interviews  in  the  banking  sector  suggested  little  difference  in  current  practice.  But  as  OJK  is  aiming  to   foster   the   development   of   Islamic   finance,   the   scope   for   making   sustainability   an   integral   part   of   Islamic   finance   in   Indonesia   should   be   further   explored   in   the   context   of   implementing   OJK’s   Roadmap   for   Sustainable  Finance.  The  Committee  for  Sharia  Financial  Services  Development  (Komite  Pengembangan  Jasa   Keuangan   Syariah,   KPJKS),   which   was   established   by   OJK   in   August   2014,   could   be   asked   to   develop   concrete   proposals   to   this   effect.   Neighbouring   Malaysia,   which   is   a   leading   market   for   Islamic   finance,   recently  “announced  guidelines  for  issuance  of  socially  responsible  sukuk  (Islamic  bonds),  aimed  at  helping   firms   raise   money   for   projects   ranging   from   renewable   energy   to   affordable   housing”   (Vizcaino   2014).   Given                                                                                                                                           31  When  contemplating  subsidy  schemes,  it  will  be  worthwhile  to  consider  Rodrik’s  (2004)  ten  design  principles  for  industrial  policy.   32  As   recently   pointed   out   in   a   recent   report   by   Fitch   Ratings   (2014),   many   BPDs   “do   not   have   appropriate   corporate   governance   due   mainly   to   weak   internal   controls,   poor   accounting   practices   and   ineffective   risk   management.   Intervention   from   regional   governments   also   makes   it  difficult  for  the  banks’  management  teams  to  conduct  business  prudently.”   33  For   contributions   in   this   discussion   see,   for   instance,  Aburawa   (2011),   Nagaoka   (2011),   Myers   and   Hassanzadeh   (2013)   and   Alawode   (2013).   An  early  study  on  the  role  of  Islamic  financial  institutions  in  sustainable  development  was  conducted  by  Hassan  and  Chachi  (2005).   UNEP  Inquiry/  IFC/  AsRIA   36   Sustainable  Financing  in  Indonesia       that   Indonesia   is   the   country   with   the   world’s   largest   Muslim   population,   the   development   potential   for   Islamic  finance  is  huge.  OJK  should  use  the  opportunity  to  shape  the  development  of  this  market  so  that  it  is   fully  aligned  with  the  country’s  sustainability  goals.   Indonesia’s  financial  markets  have   already   seen  several  important  innovations  over  the  past  years.  The  first,   and   most   important,   is   OJK’s   Roadmap,   which   holds   the   potential   to   fundamentally  alter   the   way   financial   markets   operate   in   Indonesia.   Further   policy   innovations   may   be   in   the   making,   such   as   green   weightings   on   capital  requirements.  We  have  also  seen  market  innovations  like  the  development  of  the  SRI-­‐KEHATI  index   and   recently   the   launch   of   the   SRI   KEHATI-­‐ETF   and   the   first   green   bond.   While   these   are   innovations   that   mirror   developments   in   OECD   countries,   they   are   almost   unique   for   a   developing   country.   Indonesia’s   leaders   have   realized   the   importance   of   aligning   economic   growth   with   social   and   environmental   goals.   Indonesia’s   financial   firms   should   actively   embrace   the   opportunities   that   sustainable   investment   and   lending  offer  and  support  OJK’s  mandate  to  develop  a  sustainable  financial  system.   While   this   report   has   focused   on   bottlenecks   in   banking   and   capital   markets   that   hold   back   green   lending   and   investment,   it   should   be   emphasized   once   again   that   major   bottlenecks   lie   also   on   the   real   economy   side.  Public  interventions  in  the  financial  markets  may  be  useful  to  address  some  bottlenecks,  but  it  is  clear   that   banks   and   NBFIs   require   a   pipeline   of   investable   projects   if   they   are   to   increase   their   share   of   sustainable   lending   and   investment.   For   this   to   happen,   the   Indonesian   authorities   will   need   to   facilitate   investments  procedures.  President  Widodo’s  plan  to  streamline  the  government’s  permit  process  into  a  one-­‐ stop  service  is  an  important  step  in  the  right  direction.     UNEP 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 Environmental,  Social  and   Governance  Issues  into  Institutional  Investment,  Geneva:  United  Nations  Environmental  Programme  Finance   Initiative.   UNEP  FI  (2011):  UNEP  FI  Guide  to  Banking  &  Sustainability,  Geneva:  United  Nations  Environmental  Programme   Finance  Initiative.   UNEP  Inquiry  (2014a):  Aligning  the  Financial  System  with  Sustainable  Development,  Geneva:  United  Nations   Environment  Programme  Inquiry  into  the  Design  of  a  Sustainable  Financial  System.   UNEP  Inquiry  (2014b):  Delivering  the  Green  Economy  through  Financial  Policy,  Geneva:  United  Nations   Environment  Programme  Inquiry  into  the  Design  of  a  Sustainable  Financial  System.   UNEP  Inquiry  (2015)  Aligning  the  Financial  Systems  in  the  Asia  Pacific  Region  to  Sustainable  Development.   Geneva:  United  Nations  Environment  Programme  Inquiry  into  the  Design  of  a  Sustainable  Financial  System.   UNFCCC  (2009):  National  Economic,  Environment  and  Development  Study  (NEEDS)  for  Climate  Change.   Indonesia  Country  Study.  Final  Report  December  2009,  Jakarta:  National  Council  on  Climate  Change.   UNIDO  (2011):  Green  Industry.  Policies  for  Supporting  Green  Industry.  Vienna:  United  Nations  Industrial   Development  Organization.   USAID  (2013):  “ICED  Trains  Financiers  to  Enhance  Clean  Energy  Development  in  Indonesia”,   http://www.iced.or.id/us/activities.php?c=13   Vallikappen  S.  and  B.  Moestafa  (2015):  “World’s  Most  Profitable  Banks  in  Indonesia  Double  U.S.”,   Bloomberg,  February  5,  http://www.bloomberg.com/news/articles/2013-­‐02-­‐04/world-­‐s-­‐most-­‐profitable-­‐banks-­‐ in-­‐indonesia-­‐double-­‐u-­‐s-­‐returns   Vizcaino  (2014):  “Islamic  Finance  Seeks  to  Go  Green  With  Environment-­‐based  Products”,  Reuters,  Sept  2,   uk.reuters.com/article/2014/09/02/uk-­‐islam-­‐banking-­‐agriculture-­‐idUKKBN0GX0D520140902   Vizcaino,  B.  and  G.  Suroyo  (2014):  “Indonesia  Revises  Islamic  Banking  Rules  as  Industry  Growth  Slides”,   Reuters,  November  20,  http://www.reuters.com/article/2014/11/20/indonesia-­‐banking-­‐islamicfunds-­‐rules-­‐ idUSL6N0TA04P20141120   Volz,  U.  (2014):  “On  the  Role  of  Central  Banks  in  Enhancing  Green  Finance”,  Paper  prepared  for  the  UNEP   Inquiry–CIGI  Research  Convening  on  Design  Options  for  a  Sustainable  Financial  System,  December  1-­‐3  in   Waterloo,  Ontario.   Volz,  U.,  J.  Böhnke,  V.  Eidt,  L.  Knierim,  K.  Richert  and  G.-­‐M.  Roeber  (2015):  Financing  the  Green  Transformation   –  How  to  Make  Green  Finance  Work  in  Indonesia.  Houndmills,  Basingstoke:  Palgrave  Macmillan.   World  Bank  (2003):  “Indonesia’s  Program  for  Pollution  Control,  Evaluation,  and  Rating  (PROPER)”,   Empowerment  Case  Studies,  Working  Paper,  Washington,  DC:  World  Bank   (http://siteresources.worldbank.org/INTEMPOWERMENT/Resources/14825_Indonesia_Proper-­‐web.pdf).   World  Bank  (2010):  Enterprise  Surveys.  Indonesia  Country  Profile  2009.  Washington,  DC:  World  Bank  and   International  Finance  Cooperation.   World  Bank  (2014):  “Investment  in  Flux”,  Indonesia  Economic  Quarterly,  March  2014,  www.indonesia-­‐ investments.com/upload/documenten/world-­‐bank-­‐ieq-­‐march-­‐2014-­‐indonesia-­‐investments.pdf   World  Bank  (2015):  Doing  Business  2015  Indonesia,  Washington,  DC:  World  Bank.   World  Bank  and  GFDRR  (2012):  Indonesia.  Advancing  a  National  Disaster  Risk  Financing  Strategy  –  Options  for   Consideration,  Washington,  DC:  World  Bank  and  Global  Facility  for  Disaster  Reduction  and  Recovery.   Yusuf,  A.A.  and  H.A.  Francisco  (2009):  Climate  Change  Vulnerability  Mapping  for  Southeast  Asia,  Singapore:   Economy  and  Environment  Program  for  Southeast  Asia.   UNEP  Inquiry/  IFC/  AsRIA   41   Sustainable  Financing  in  Indonesia       Annex  1:  Proposal  for  green  banking  framework       Phase  1  (1  year)   Ÿ Announcement  of  a  detailed  definition  of  green  finance,  with  appropriate  information  for  banks   and  capacity  building  measures  that  will  help  banks  to  implement  the  following  required  and   suggested  measures.   Ÿ Banks  are  encouraged  to  send  their  staff  to  regular  capacity  building  measures  related  to  green   finance.   Ÿ Banks  are  requested  to  screen  their  existing  portfolio  and  categorize  outstanding  loans  as   “green”  or  “non-­‐green”  according  to  the  regulator’s  official  green  finance  definition.  The  same   categorization  should  be  applied  for  new  loans.   Ÿ Within  one  year  banks  should  provide  the  financial  regulator  with  an  overview  of  the  share  of   green  loans  in  their  total  portfolio.   Ÿ Banks  need  to  introduce  environmental  and  social  risk  management  systems.   Phase  2  (3-­‐5  years)   Ÿ Taking  into  account  the  initial  position  of  banks  with  respect  to  green  finance,  the  regulator   announces  a  non-­‐binding  target  for  the  share  of  green  finance  in  banks’  portfolios  that  should   be  reached  by  banks  within  three  to  five  years.34   Ÿ Banks  are  required  to  designate  a  board  member  responsible  for  green  finance  and  report   every  year  to  the  regulator  their  share  of  green  finance  in  their  portfolio.  The  results  will  be   openly  published  by  the  regulator  in  an  annual  report  on  green  banking.   Ÿ There  will  be  annual  awards  for  banks  with  a  high  share  or  a  rapidly  increasing  share  of  green   lending.   Phase  3  (open-­‐ended)   Ÿ The  regulator  will  evaluate  the  progress  made  by  individual  banks  in  achieving  the  green  finance   targets  set  out  at  the  beginning  of  phase  2  and  decide  on  binding  targets  for  the  share  of  green   finance  in  banks’  portfolios.   Ÿ Banks  that  do  not  achieve  the  binding  target  will  be  required  to  pay  a  penalty  fee  at  the  end  of   each  year  into  a  newly  established  green  finance  fund.  Underperforming  banks  will  also  be   required  to  present  a  plan  for  improvement.  The  regulator  will  continue  publishing  annually  a   report  on  Green  Banking  in  Indonesia.   Ÿ Annual  awards  for  banks  with  a  high  share  or  a  rapidly  increasing  share  of  green  lending.       Source:  Volz  et  al.  (2015).                                                                                                                                           34  This  approach  would  follow  on  Bank  Indonesia's  requirement  that  banks  extend  at  least  20%  of  their  credit  to  SMEs.   UNEP  Inquiry/  IFC/  AsRIA   42   Sustainable  Financing  in  Indonesia       Annex  2:  Roadmap  implementation  plan   No.   Activity   Timeframe   Notes   1   Regulation  on   2015-­‐2016   Issuance  of  an  umbrella  policy  and  regulations  on  sustainable   principles  and   finance,  setting  forth  the  definition  and  principles.   definition  of   Development  of  supervision  guidelines  on  sustainable  finance   sustainable  finance   program  implementation.   in  Indonesia   2   Policy  and   2015-­‐2016   Development  of  policies/regulations  to  increase  financial  service   regulation  to   institutions’  portfolios  on  sustainable  finance.   increase   For  example,  by  providing  incentives  to  increase  sustainable   sustainable  finance   finance  portfolios  and  special  allowances  to  reduce  productive   portfolios   portfolios.  Increase  of  sustainable  financing  can  be  applied  on  both   productive  and  consumptive  sectors.   3   Prudential   2015-­‐2016   Provision  of  prudential  incentives,  such  as  a  certain  level  of  risk-­‐ incentives     based  balanced  asset  (ATMR)  in  consideration  of  a  risk  mitigation   mechanism.   4   Fiscal  incentives   2016-­‐2018   Provision  of  fiscal  incentives,  such  as  a  tax  holiday  and  feed-­‐in-­‐ tariff,  in  collaboration  with  relevant  ministries.   5   Non-­‐fiscal   2016-­‐2018   Provision  of  non-­‐fiscal  incentives,  such  as  targeted  loans  and  a   incentives   guarantee  scheme,  in  collaboration  with  relevant  ministries.   6   Information  hub  on   2016   Development  of  an  integrated  information  system  on  sustainable   sustainable  finance   finance,  i.e.  key  information  for  FSI  provided  by  relevant  ministries,   green  lending  models,  information  on  new  financial  products  and   supervision  procedures.  The  information  is  available  for  FSI,   government  officials  and  wider  audience  and  presented  in  a   microsite  at  OJK  website.   7   Sustainability   2016-­‐2017   Issuance  of  a  sustainability  report  will  gradually  become  mandatory   report   to  provide  transparency  to  the  wider  public  and  for  OJK   supervision.  The  sustainability  report  will  be  part  of  an  integrated   report.   8   Sustainable  finance   2016-­‐2024   Special  award  granted  to  commendable  FSI  that  lead  to  the   award  (SFA)   implementation  of  sustainable  finance.  The  prize  will  be  awarded   by  OJK  in  collaboration  with  Ministry  of  Environmental  Affairs  and   Forestry  and  other  relevant  institutions.   9   Policy  and   2019-­‐2024   Refinement  of  policies/regulations  in  the  area  of  risk  management   regulation  on  risk   relevant  to  sustainable  finance  to  include  environmental  and  social   management   aspects.   related  to   sustainable  finance   program   implementation   10   Campaign  program   2015-­‐2019   Implementation  of  a  campaign  program  to  the  public  as  potential   investors  in  partnership  with  relevant  institutions.   11   Green  lending   2015-­‐2019   Provision  of  green  lending  models  pertaining  to  priority  sectors  in   models  for  priority   2015-­‐2016  with  special  focus  on  supporting  a  national  energy   sectors   security  plan.   UNEP  Inquiry/  IFC/  AsRIA   43   Sustainable  Financing  in  Indonesia       12   Environmental   2015-­‐2019   Provision  of  environmental  analysts  trainings  in  collaboration  with   analysts  training   training  providers,  universities  and  donor  institutions.  The  target  is   to  train  1,000  –  2,000  staff  members  of  FSI,  OJK  officials  and  OJK   supervisors  in  5  years.   13   Development  of   2015-­‐2024   Development  of  green  products  for  banking  and  non–banking   green  product  both   industries.  The  activity  might  include  using  international  best   for  banking  and   practices  and  standards  as  benchmarks.   nonbanking   industries   14   Development  of   2015-­‐2024   Provision  of  required  supports  to  relevant  government  institution   green  bonds  in   and  industry  practitioners  in  the  development  and  issuance  of   Indonesia   green  bonds.   15   Development  of   2015-­‐2024   Support  to  the  Indonesia  stock  exchange  and  capital   green  index  in   market  practitioners  to  develop  green  index.   Indonesia   16   Focus  group   2015-­‐2024   Focus  group  discussions  and  seminars  are  to  be  held  in   discussions  and   collaboration  with  relevant  ministries  and  donor  institutions.   seminars   17   Research  and   2015-­‐2024   Joint  research  in  collaboration  with  national  and  international   development   research  centres  on  sustainable  finance.   18   Increase  access  of   2015-­‐2024   Supports  and  facilitation  for  FSI  to  increase  their  access  to  global   financial  service   public  funds  taking  into  account  risks  mitigation  mechanism  (macro   institutions  to   and  micro  prudential).  Increase  the  participation  of  OJK  in   global  public  fund   international  forums  related  to  climate  change  and  sustainable   development  issues  such  as  UNFCCC,  APEC  and  G-­‐20.   Coordination  forum   2015-­‐2024   Establishment  of  Sustainable  Finance  Forum,  with  specific   19   on  sustainable   objectives:   finance   •  To  accelerate  the  issuance  of  government  regulation  on   technical  implementation  of  Law  32/2009  concerning   Environmental  Protection  and  Management.   •  To  discuss  lessons  learned  and  challenges  pertaining  the   implementation  of  sustainable  finance  program.   •  As  a  mean  to  conduct  regular  evaluation  on  the  progress  of   sustainable  finance  program  and  increase  active  participation   of  OJK  regional  offices  at  regional  levels.   Source:  OJK  (2014b:  27-­‐30).     UNEP  Inquiry/  IFC/  AsRIA   44   Sustainable  Financing  in  Indonesia       Annex  3:  IIF’s  8  Social  Environment  Principles   1.  Social  and  Environmental  Assessment  and  Management  System  (SEMS)  Incorporates    the  following  elements:   Ÿ Screening  and  categorization  of  projects.   Ÿ Social  and  environmental  (S&E)  assessment,  S&E  management.   Ÿ Organizational  capacity.   Ÿ Training  Community  engagement  and  consultation.   Ÿ Monitoring,  reporting  and  continuous  improvement.     2.  Labour  and  Working  Conditions   Ÿ Establishes,  maintains  and  improves  worker-­‐management  relationship.   Ÿ Addresses  child  labour  and  forced  labour.   Ÿ Promotes  safe  and  healthy  working  conditions.     3.  Pollution  Prevention,  Abatement,  &  Climate  Change   Ÿ Addresses  pollution  prevention  and  management  of  impacts  arising  from  project  activities.   Ÿ Ensures  conformance  with  global  good  practice  and  standards.   Ÿ Ensures  that  climate  change  issues  associated  with  project  activities  are  assessed,   mitigated  and  monitored  over  the  life  of  IIF’s  investment.     4.  Community  Health,  Safety,  &  Security/Dam  Safety   Ÿ Seeks  to  avoid  or  minimize  the  risks  and  impacts  to  community  health,  safety  and  security   that  may  arise  from  project  activities.   Ÿ Includes  special  requirements  related  to  the  safety  of  dams  associated  with  projects.     5.  Land  Acquisition  and  Involuntary  Resettlement*   Ÿ Refers  to  both  physical  displacement  (relocation  or  loss  of  shelter)  and  economic   displacement  (loss  of  assets  or  access  to  assets  that  leads  to  loss  of  income  sources  or   means  of  livelihood)  as  a  result  of  project-­‐related  land  acquisition.   Ÿ Does  not  apply  to  physical  displacement  or  resettlement  resulting  from  voluntary  land   transactions.   Ÿ Impacts  are  to  be  avoided,  minimized,  mitigated  or  compensated  for  through  the  process   of  Social  and  Environmental  Assessment  under  Principle     6.  Biodiversity  Conservation  and  Sustainable  Natural  Resources  Management*   Ÿ Includes  protection,  conservation  and  management  of  biodiversity,  and  promotes  use  of   renewable  natural  resources.     7.  Indigenous  People  (IP)*   Includes   identification   of   all   impacts   (positive   and   negative)   on   indigenous   people;   social   assessment,   informed  consultation  and  disclosure  to  indigenous  people  of  development  plan.     8.  Cultural  Property  and  Heritage*     Ÿ Recognizes  the  importance  of  cultural  property  and  heritage  for  current  and  future   generations,  consistent  with  the  Convention.   Ÿ Concerning  the  Protection  of  the  World  Cultural  and  Natural  Heritage.   Ÿ Seeks  to  guide  IIF  project  sponsors  in  identifying  and  protecting  cultural  heritage  in  the   course  of  project  design  and  execution.     *  Applicability  of  this  Principle  will  be  determined  during  project  screening  and  appraisal   Source:  http://iif.co.id/en_US/social-­‐environment-­‐principal   UNEP  Inquiry/  IFC/  AsRIA   45   Sustainable  Financing  in  Indonesia       Annex  4:  SRI  KEHATI  Index   As   of   8   June   2009,   in   an   effort   to   develop   its   programs,   KEHATI   has   developed   a   close   relationship  with  the  business  sector  and  in  cooperation  with  the  Indonesia  Stock  Exchange  (BEI)   has   launched   KEHATI   SRI   Index,   following   the   standard   and   regulation   of   Sustainable   and   Responsible  Investment  (SRI).   The   basic   year   used   as   initial   index   year   with   a   100   basis   was   30   December   2006   and   was   publicized  by  BEI  as  KEHATI  SRI  Index  at  the  position  of  116,946.  By  launching  KEHATI  SRI  Index,  it   was  expected  that  the  public  would  be  made  aware  of  the  presence  of  an  index  showing  which   companies  were  regarded  as  beneficial  and  constantly  managing  sustainable  development.   The  objective  of  the  index  establishment  is  to  materialize  biodiversity  conservation  programs  by   raising  awareness  and  consciousness  toward  biodiversity  among  the  public,  business  sector  and   capital  market,  and  to  provide  open  information  to  the  public  at  large  in  identifying  the  selected   companies  rated  by  the  index.     The  companies  are  considered  to  have  various  considerations  in   running  their  business  in  relation  to  environmental  concerns,  business  management,  community   involvement,  human  resources,  human  rights,  their  business  behavior  and  way  of  operation  with   internationally  accepted  business  ethics.   KEHATI  has  picked  25  selected  companies  considered  eligible  to  meet  KEHATI  SRI  Index  criteria   so   that   they   can   be   used   as   guidance   for   investors.   The   presence   of   those   companies   will   be   evaluated  twice  a  year,  in  April  and  October,  and  the  result  will  be  publicized  by  BEI,  which  can  be   followed  through  www.idx.co.id   The  selection  mechanism  for  the  companies  to  be  included  in  KEHATI  SRI  Index  consists  of  two   steps.   The   first   step   is   an   initial   selection   through   negative   and   financial   aspects.   The   second   step   is  to  evaluate  fundamental  aspects.  The  initial  step  is  taken  to  ensure  that  the  selected  companies   are  eligible  to  meet  the  following  pre-­‐conditions:   1.         Negative   Selection:   pesticide,   nuclear,   weapons,   tobacco,   alcohol,   pornography,   gambling,   genetically  modified  organism  (GMOs)   2.        Financial  Aspects:   Ÿ Market  Capitalization  of  above  Rp  1  Trillion     Ÿ Assets  above  Rp  1  Trillion.   Ÿ 10  percent  Free  Float  Ratio   Ÿ Positive  Price  Earning  Ratio  (PER  )  during  the  last  six  months.   The   fundamental   aspects   will   be   evaluated   after   the   companies   have   successfully   passed   the   initial  step.  The  aspects  include  several  areas.   3.        Fundamental  Aspects:   Ÿ Corporate  Management   Ÿ Environment   Ÿ Community  Involvement   Ÿ Business  Manners   Ÿ Human  Resources   Ÿ Human  Rights   The  evaluation  is  done  through  a  review  on  secondary  data,  a  questionnaire  filled  in  by  those  who   have   passed   the   initial   selection,   and   through   other   relevant   data.   As   the   result,   25   companies   with  the  highest  score  were  declared  eligible  to  be  included  into  KEHATI  SRI  Index.   Source:  http://www.kehati.or.id/en/indeks-­‐sri-­‐kehati-­‐2.html   UNEP  Inquiry/  IFC/  AsRIA   46   Sustainable  Financing  in  Indonesia       About  the  partners   United   Nations   Environment   Programme   (UNEP)   Inquiry   ‘Design   of   a   Sustainable   Financial   System’   was   launched   in   January   2014   and   will   run   until   the   end   of   2015.   The   Inquiry   is   investigating   policy   options   to   improve   the   financial   system’s   effectiveness   in   mobilizing   capital   towards   sustainable   development.   Ultimately,   the   Inquiry’s   aim   is   to   develop   a   portfolio   of   policy   options   –   tools,   instruments   and   pathways   relating  to  banking,  insurance,  investment  and  relevant  aspects  of  the  monetary  system.  Across  these  sub-­‐ sectors,  four  main  interventions  are  investigated:  policy,  regulation,  fiscal  policy;  private  standards  (including   accounting  rules  and  ratings)  and  public  finance  as  it  relates  to  state-­‐directed  financial  institutions.   A  core  part  of  the  Inquiry’s  work  are  a  series  of  country  level  engagements  to  identify  national  innovations  in   norms,   instruments   or   policies;   and   highlight   developments   that   could   have   international   resonance.   Countries   and   regions   include   Bangladesh,   Brazil,   China,   Colombia,   Europe,   India,   Indonesia,   Kenya,   South   Africa,   Uganda,   the   United   Kingdom   and   the   United   States   of   America.   Insights   being   gathered   from   the   Inquiry’s   country   engagements   will   shape   the   development   of   principles   used   to   design   a   sustainable   financial  system.   International  Finance  Corporation  (IFC)   is   the   largest   global   development   institution   focused   exclusively   on   the   private   sector   in   developing   countries,   and   has   been   utilizing   its   investment   and   advisory   services   to   develop  local  financial  markets  and  leverage  the  private  sector  to  advance  innovative  and  viable  solutions  to   ensure   environmental   and   social   sustainability.   Recognizing   that   the   majority   of   green   investment   to   date   has  been  domestic  in  origin,  IFC  has,  since  2012,  been  supporting  the  G20’s  Development  Working  Group  in   their   efforts   to   mobilize   private   investment   for   inclusive   green   growth,   including   from   domestic   institutional   investors.   In  order  to  scale  up  domestic  green  investment,  IFC,  with  funding  support  from  GIZ,  is  partnering  with  the   UNEP   Inquiry   in   Colombia,   Indonesia   and   Kenya   to   jointly   undertake   a   mapping   of   the   investor   ecosystem   in   these  countries,  looking  at  existing  practices,  enabling  environment,  regulations,  barriers,  and  instruments   for  green  investment.  This  is  intended  to  inform  the  potential  development  of  a  collaborative  road-­‐map  to   addressing  the  barriers  to  be  produced  jointly  with  the  regulators  and  investors  in  each  country.  This  work   will   feed   into   GreenInvest   –   a   public-­‐private   investor   platform   being   established   in   2015   by   the   G20   to   mobilize   green   investment   and   facilitate   the   tailoring   of   global   instruments,   tools   and   frameworks   to   national  contexts.   ASrIA   (the   Association   for   Sustainable   &   Responsible   Investment   in   Asia)  is  the  leading  organization  in  Asia   dedicated   to   promoting   sustainable   finance   and   investment   across   the   region.   ASrIA   aims   to   play   a   significant   role   as   a   thought   leader,   advocate   and   convener   in   facilitating   Asia’s   transformation   to   a   sustainable   future.     Through   the   Asia   Investor   Group   on   Climate   Change   (AIGCC),   ASrIA   aims   to   create   awareness  among  Asia's  asset  owners  and  financial  institutions  about  the  risks  and  opportunities  associated   with  climate  change  and  low  carbon  investing.   The   Alliance   for   Public   Private   Climate   Finance   Asia-­‐Pacific   was   established   in   2012   by   AIGCC   and   Deutsche   Gesellschaft  für  Internationale  Zusammenarbeit  (GIZ)  (GIZ-­‐AIGCC/ASrIA  Alliance)  to  encourage  and  facilitate   low   carbon   and   climate-­‐resilient   development   in   Asia-­‐Pacific.   The   mission   of   the   Alliance   is   to   (i)   Provide   advice   on   the   creation   of   support   mechanisms   to   channel   capital   into   low   carbon   and   adaptation   projects   in   the   region,   (ii)   Establish   a   dialogue   platform   for   private   sector   investors   and   (iii)   Support   the   capacity   development   of   government   institutions   and   stakeholders.   In   support   of   GIZ-­‐AIGCC/ASrIA   Alliance’s   goals,   ASrIA   is   carrying   out   an   investigation   into   Policy   and   Regulatory   Barriers   to   Climate   Finance   in   Asia-­‐Pacific,   featuring  a  case  study  on  Indonesia.  Specifically,  this  will  focus  on  the  role  that  financial  market  policy  and   regulation   can   play   in   terms   of   enabling   and   incentivizing   private   capital   flows   towards   climate   finance,   primarily  as  this  relates  to  the  region’s  financial  markets.         UNEP  Inquiry/  IFC/  AsRIA   47   Sustainable  Financing  in  Indonesia       Selected  Inquiry  Publications   Downloadable  from  www.unep.org/inquiry/knowledge         ALIGNING  THE   FINANCIAL   SYSTEMS  IN  THE   ASIA  PACIFIC   REGION  TO   SUSTAINABLE   DEVELOPMENT         UNEP  Inquiry/  IFC/  AsRIA   48   Sustainable  Financing  in  Indonesia                                                           Inquiry:  Design  of  a  Sustainable  Financial  System   International  Environment  House     Chemin  des  Anémones  11-­‐13   Geneva   Switzerland   Tel.:  +41  (0)  229178995   Email:  inquiry@unep.org     Twitter:  @FinInquiry   Web:  www.unep.org/inquiry/