CASE STUDY First Corporate Green Bond in Indonesia Supporting Indonesia’s Efforts to Fight Climate Change OVERVIEW Indonesia, the largest archipelagic country in the world with extensive tropical rainforests, high carbon stock values and energy and mineral resources, is firmly committed to stepping up climate change mitigation and adaptation activities. As a responsible and committed member of the global community, Indonesia has ratified the Paris Agreement and submitted Nationally Determined Contributions (NDCs) that set out its commitment to a low carbon and climate resilient future. The green bond is a key tool to finance such activities. Background Photo credit PT SMI The Government of Indonesia is encouraging public and private sector issuers to contribute towards its mitigation renewable energy and low emission transport projects and adaptation targets by issuing green bonds. Indonesia that directly reduce GHG emissions. PT SMI had already Financial Services Authority (FSA) developed green bond established a Sustainable Financing Division in 2016 to regulations in December 2017 with inputs and comments oversee green projects and Environmental, Social, and from the World Bank. The Ministry of Finance issued a Advisory Evaluation Division to implement an green Islamic bond (sukuk) in February 2018. Environment & Social Management Framework; and was approved as an accredited Direct Access Entity to the In January 2018, the World Bank and Ministry of Finance Green Climate Fund. convened key market participants, including state-owned enterprises (SOEs) and private sector issuers, investment banks, environment specialists, government officials and Challenges regulators to discuss the potential for green bond There were no benchmarks for the issuance of green issuance in Indonesia. The objective was to leverage the bonds in Indonesia. The FSA green bond regulations had World Bank’s experience as pioneer green bond issuer to not been tested. The ASEAN Green Bond Standards had share international best practices and address the not been used outside Malaysia. There was a lack of concerns of market participants. knowledge and understanding about the process and requirements for issuing a green bond. Moreover, PT SMI PT Sarana Multi Infrastruktur (Persero) (PT SMI), an SOE did not have the internal capacity to measure and report under the Ministry of Finance, stepped forward to on metrics relevant for mitigation and adaptation impact kickstart the local green bond market. As an infrastructure reporting. Yet, as the first mover it was very important for financing company, PT SMI was uniquely positioned to PT SMI to set market standards in Indonesia. contribute to Indonesia’s NDCs by mobilizing financing in Solution environmental and social risk management throughout the project cycle. Final project selection and approval is The World Bank developed a technical assistance made by senior-level representatives from the technical, program for PT SMI. The engagement was funded by SECO legal, risk management, and financial departments. (Swiss Secretariat for Economic Affairs) and Global Affairs Canada as part of a broader capital markets development program in Indonesia. The World Bank team included Management of proceeds sustainable finance experts from Treasury, capital Green bond proceeds are allocated and managed by the markets experts from the Finance, Innovation and Finance & Investor Relations Division following Competitiveness Global Practice (FCI), and environment recommendations from the business units (Financing and experts. Investment Division and Sustainable Financing Division). The Finance & Investor Relations Division tracks allocation The Treasury team clarified requirements and compliance of proceeds within its internal management system, with local regulations, regional guidelines and noting project descriptions, locations, and amount of international best practices. PT SMI’s green bond proceeds allocated. Pending allocation, net proceeds framework was designed to comply with the FSA green from the sale of the bond is invested in cash, cash bond regulations and align with ICMA’s 2017 Green Bond equivalents and/or marketable securities. All funds are Principles as well as ASEAN Green Bond Standards. fully allocated within one year. The team helped PT SMI establish a working committee; At every stage of the process, PT SMI chose to take a developed a green bond issuance roadmap; and drafted a conservative stance to ensure full compliance with green bond and sukuk framework. World Bank international best practices. For instance, Indonesia’s FSA environment experts reviewed the framework for regulation allows the use of 30% of green bond proceeds sustainability and environmental issues and helped build for “incidental expenses.” PT SMI, however, committed to PT SMI’s capacity to select, evaluate, and monitor utilize 100% of proceeds for green projects. They also projects. Finally, the World Bank FCI team facilitated the decided against using green bond proceeds to finance delivery of a second opinion by CICERO (Center for large hydro and biofuel from forest-based feedstocks. International Climate Research in Oslo). CICERO opined that “PT SMI’s green bond and green sukuk framework provides a structured, sound approach to green financing Reporting for business activities that protect and/or improve the PT SMI committed to publishing an annual use of quality or function of the environment.” proceeds and environmental impact report on its website until the maturity of the green bond. The report will be Project evaluation and selection reviewed by a senior-level team comprising Financing and Investment, Sustainable Financing, Corporate PT SMI’s green bond eligible project categories included Development and Initiative Management, Corporate renewable energy, energy efficiency, sustainable Secretary and Finance & Investor Relations Divisions. The pollution management and prevention, sustainable World Bank is providing technical assistance to PT SMI for natural resources and land use management, clean the preparation of the impact report. transportation, and sustainable water and sewage management. These categories were selected to ensure Outcome alignment with the Government’s mitigation and On July 9, 2018, PT SMI issued the first corporate green adaptation targets. Fossil fuel power generation was bond in Indonesia. See details below. explicitly excluded. Issuer PT Sarana Multi Infrastruktur (Persero) PT SMI’s green projects are evaluated based on financial Issuer Rating id AAA (Pefindo) viability and screened for environmental and social risks Aggregate Size IDR3tn program bond (first issuance as well as the eligibility and exclusionary criteria outlined IDR500bn) in the green bond framework. Its Corporate Development Maturity 3 yrs & 5 yrs and Management Initiative (reporting directly to the Tranche Size IDR251.5bn (3 yrs) & IDR248.5bn (5 yrs) President of PT SMI), Environmental and Social Safeguard Coupon Rate 7.55% (3 yrs) & 7.80% (5 yrs) (ESS) Division (reporting to the Risk Management Demand IDR978bn Director), Financing and Investment Division, Legal Use of LRT and Mini Hydro Power Plant Division and Finance & Investor Relations Division are Proceeds responsible for conducting due diligence, project approval review, and technical monitoring of For information, contact: Miguel Navarro-Martin, Manager, Banking Products mnavarromartin@worldbank.org, +1 (202) 458 4722