INDONESIA’s Financial Sector: Contributing to Sustainable Finance

IMANSYAHDeputy Commissioner of Internasional and Research

Co-Chair SBN - Measurement and Green Bonds Working Groups

Prepared for Economic and Social Survey of Asia and the Pacific 2020

“Living within our planetary limits” Conference AgendaOctober 17-18, 2019, United Nations Conference Centre, Bangkok - Thailand

Indonesia is a country with vast natural resources, comprising of over 17,508 islands stretching 3,261 miles from east to west wider than distance from

Washington DC to San Fransisco California (2,815 miles), with forest area that reaches 120,6 hectares or covers approximately 63% of Indonesia’s terrestrial.

INDONESIA AND ITS RESOURCES..

Natural resources play a crucial role in supporting economic growth and development in Indonesia

Indonesia forests function as the

lungs of the world.

As a country with fertile soil

Indonesia is a perfect place for

various kind of plantations to

grow, especially spices.

Agriculture is one of the key

sectors within the Indonesian

economy.

Chilies have become part of

Indonesian identity.

Indonesia is the second biggest

producer of fish in the world

where around 6 million people

rely on fishing.

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CLIMATE CHANGE & POTENTIAL FINANCIAL RISKS..

OJK keeps monitoring the impact of climate change to the banks performance to mitigate the systemic risks

3

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5

10

15

20

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

BPD JAMBI BPD RIAU & RIAUISLANDS

BPD WESTKALIMANTAN

BPD CENTRALKALIMANTAN

Rp

Tri

liu

n

%Loan NPL Gross NPL Nett

370

9,33%

0

50

100

150

200

250

300

350

400

0%

2%

4%

6%

8%

10%

12%

14%

16%

Oct

-17

Nov

-17

De

c-17

Jan-

18

Feb-

18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-

18

Aug

-18

Sep-

18

Oct

-18

Nov

-18

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c-18

Jan-

19

Feb-

19

Ma

r-19

Apr

-19

May

-19

Jun-

19

Jul-

19

Aug

-19

Sep-

19

Rp T

riliu

n

Loan (Rp) Growth (yoy)

0

0,02

0,04

0,06

0,08

0,1

0,12

0,14

43009 43070 43132 43191 43252 43313 43374 43435 43497 43556 43617 43678

Farming, Plantation & Forestry Mining

Manufacture Construction

Wholesale Trading Transportation

Household Total Loan

1,46%

2,86%

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

3,50%

4,00%

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb-

18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Sep-

18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

Feb-

19

Mar

-19

Apr

-19

May

-19

Jun-

19

Jul-1

9

Aug

-19

Sep-

19

NPL ratio Special Mention (SM) ratio

The World Bank report that put

the cost at IDR 221 trillion ($16 billion) covered the

impact on agriculture, forestry, trade, tourism and transportation, as well as school closures, emergency response and fire suppression and the cost to the environment. Short-term effects of

haze exposure on health were

included, but not long-term.

SUSTAINABLE FINANCE ACCELERATION STRATEGY..

OJK is committed to establishing an effective regulatory environment to encourage the development of sustainable financing for the achievement of the SDGs.

Independent assessor that are qualified to assess green projects.

Strategic national policies and leadership role.

Adequate level of literacy –on the part of investors, issuers and regulators— on issues related to environment and the SDGs, including specific issues including green financing schemes.

Availability of experts in the sustainable development and sustainable finance.

Clear global standards in green financing.

Scaled-up coordination efforts among Government agencies, domestic and international organizations as well as private sector.

4

INDONESIA’S FINANCING FOR SDGs..

There is a financing gap for SDGs in the developing countries approximately US$ 2,5 trillion

There are 3 scenarios for financing sustainable development in Indonesia

1. Business as Usual IDR 2714 trillion (2020) and IDR 7721 trillion (2030)2. Moderate Intervention IDR 2778 trillion (2020) and IDR 9405 trillion (2030)3. High Intervention IDR2867 trillion (2020) and IDR 10397 trillion (2030)

5

INDONESIA SUSTAINABLE FINANCE JOURNEY..

2012

2013

2015

2014

2016

2017

2018

2019

OJK a founding

member and joining SBN

OJK Developing Roadmap

OJK Issued SF Roadmap

2015-2019

OJK1. Awareness

Programs2. Green

lending models

1. OJK SF Award2. First Movers

Sustainable Banking

3. GoI ratified Paris Agreement on Climate Change

4. BCSF established

1. OJK SF Umbrella Regulation,

2. OJK Green Bond guidelines

3. GoI adopt SDGs initiative

1. 1st Green Bond/Sukuk issued by Government and Financial Institution

2. OJK SF guidelines for Banking

3. ISFI established

4. Introduction blended finance scheme

1. 1st SF action plan by banks

2. OJK SF Monitoring

3. OJK Developing Roadmap Phase II 2020-2024

4. OJK SF research programs

5. Blended Finance

6. Sustainable Finance Initiatives

2015-2019 implementation of OJK SF Roadmap

50 batches training program for 1000 SF officers

8 banks as the tfirst movers

2 banks, 1 NBFIs issued green bonds about USD 669 M

USD 2,4 bio blended finance commitments for SDGs

How could we close the funding gap, mobilize the capital, and increase investors’ participation?

6

OJK’S ENDEAVOUR TOWARDS SUSTAINABLE FINANCE..

• 80% commercial

banks has submitted Sustainable Finance Action Plans.

• Increasing portfolio to finance sustainability projects: green buildings, ecotourism, renewable energy, organic farming, and sustainable infrastructures.

• Green insurance• Encourage leasing and

finance companies to provide financing for organic farmers, fishermen, and MSMEs.

• Set up microfinance institutions (with Islamic boarding schools all over Indonesia) that provide loans to environment-friendly businessess.

• Listed companies shall submit action plans on the implementation of sustainable finance principles by end of this year,

followed by securities companies in 2 years.

• Regulations that support the issuance of

sustanability bonds and green sukuk.

ISFI is a forum for cooperation among financial institutions in the field of sustainable finance. The existence of ISFI is

increasingly complementing the ecosystem of sustainable finance in Indonesia.

The program of sustainable finance on Banks, Capital Market and Non Bank Financial Institutions

BANKS Capital Market NBFI

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FIRST MOVER BANKSTHE FIRST MOVER BANKS..

8 banks with the largest assets in Indonesia commit to standing as the Pioneer of Sustainable Banking.

The first Pilot Project of the First Movers is to fund

the ESG (Environmental,

Social and Governance) and

green project

They also initiated the Indonesia Sustainable Finance Initiatives to invite other financial institutions to join as

the First Mover

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169mio

USDINDONESIA’S SUSTAINABLE FINANCE PORTFOLIOS..

Assist in mitigating early-entrant costs or project risks and helping re-balance risk-reward profiles for pioneering investments

GREEN LOANS

US$9,45 billion or IDR132,7 trillion

GREEN BONDS

US$ 669 million or IDR9,5 trillion

GREEN SUKUK

US$3,2 billion or IDR45 trillion

• PT. Sarana Multi Infrastruktur (PT SMI) for amount US$35milion or IDR500 billion in 2018

• OCBC NISP for amount US$ 134 million or IDR2 trillion in 2018

• PT. BRI for amount US$500 million or IDR7 trillion in 2019 Global Green Bonds

US$ 180 Billion

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OJK’S REGULATION ON SUSTAINABLE FINANCE 2017

A NEED FOR THE STANDARDISED SUSTAINABILITY REPORTING ..

• Green component of banks’ portfolios

is at 2 percent of total financing, with

growth of 14 percent per annum from

2016 to 2018.

the largest banks and foreign

banks are required to:

setting out their implementation of

the sustainable finance initiative

prepare an annual sustainability

report.

REVIEW OF THE EIGHT FIRST MOVER BANKS’

PORTFOLIO IN 2016-2018.

around 53BANKS

submit annual action plans to OJK For eight banks surveyed representing

over 50 percent of total banking assets,

• 7 banks have formalized an E&S

policy,

• while 5 banks have included E&S

covenants in loan agreements and

have defined an E&S function to

varying extents. (OJK, Dec 2018).

• Gaps remain on climate aspects

with only two banks tracking

environmental benefits achieved.

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The Standardised Report will determine

the effectiveness of supervision incld.

stress testing for SF.

SUSTAINABLE FINANCE REPORTING..

Risks management due to the application of Sustainable Finance concerning economic, social and environmental aspects

Elements covered by a sample of country FI reporting

templates issued by regulators/ associations:

OJK outlines the need to disclose information on a “Target Achievement Strategy”

What’s included in the “Target Achievement Strategy”?

Seizure of business opportunity

and prospect

Description on economic, social

and environmental external

situations that may potentially

affect FIs, Issuer and Publicly

Listed Company sustainability.

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THANK YOUSustainable Finance Website

www.ojk.go.id/sustainable-finance

(021) 2960 0000

(021) 385 8321

humas@ojk.go.id

OJK Contact 157

National Energy Policy (2014):

near-100 percent electrification

by 2020 from the current rate of

96%, and achieve its renewable

energy share in the national

energy mix to 23% by 2025.

World’s sixth-largest emitter

of greenhouse gases,

mainly due conversion of its

forests and carbon-rich peat

lands to agricultural fields.

Nationally Determined

Contributions: unconditionally

reduce its emissions by almost

a third (29%) against 2030

business-as-usual (BAU)

scenario or more (41%)

provided that international

assistance is available.

INDONESIA’S COMMITMENT TO CUT GREENHOUSE GAS EMISSIONS

29% independently and up to 38% with international cooperation and support under the 2015 Paris Agreement by 2030

Indonesia’s rainforests—the

world’s third largest—

home to more than 3,000

known species of animals,

29,000 species of plants, and

the livelihoods of 50-60 million

people depend directly on these

ecosystems.

OUR CHALLENGE & POTENTIAL OUR COMMITMENTS

INDONESIA HAVE BECOME THE TOP TWO FIRST MOVERS IN MATURING STAGE

OJK was the first to introduce a 10- year strategic roadmap for sustainable finance market development in 2014, followed by:

Demonstrated pioneering policy actions (e.g. measurement of bank adoption of new practices and the impacts of green finance)

INDONESIA’S POLICY

1. umbrella policy to green the entire

financial system,

2. a set of sustainability reporting

requirements,

3. green loan definitions, and

4. a green bond framework.

Eight major Indonesian banks have been

pioneering policy implementations to

systematically green their investment portfolios.

INDUSTRY’S RESPONSE

$10.3B Green Climate Fund

$0.19B Adaptation Fund

$8.3B Climate Investment Fund

http://www.greenclimate.fund/who-we-are/about-the-fund;

https://www.adaptation-fund.org/about/financial-status/

http://fiftrustee.worldbank.org/Pages/adapt.aspx ;

https://www.climateinvestmentfunds.org/about

• Clean Technology Fund →USD 5.6 billion;

• Pilot Program for Climate Resilience → USD 1.2 billion;

• Scaling Up Renewable Energy in Low Income Countries Program →USD 780 million;

• Forest Investment Program→ USD 775 million

United Nations Framework Convention on Climate Change

1. RPSP (The Readiness and Preparatory Support ) US$ 850.000

2. PPF (Project Preparation Facility) BRT Semarang US$ 788.000

3. GREM US$ 100 million4. CIO US$ 100 millionTotal: US$ 201.638.000

>> Grant from GEF <<

Current GERM realizationFor Phase 1 (total US$ 325 million)

IBRD Loan US$ 150 millionCTF Loan US$ 40 millionCTF Grant US$ 35 millionGCF Loan US$ 7.5 million

GCF Grant US$ 92.5 million

GLOBAL INVESTMENT FUNDTO SOLVE CLIMATE CHANGE IN INDONESIA

169mio

USDPORTFOLIO OF SUSTAINABLE FINANCEPriority sectors in receiving the funds

9,510,214

10,153,067

10,667,511

8,500,000

9,000,000

9,500,000

10,000,000

10,500,000

11,000,000

2016 2017 2018

6,241,108

8,108,071 8,582,848

-

5,000,000

10,000,000

2016 2017 2018

1,207,667 1,418,462 1,509,923

-

500,000

1,000,000

1,500,000

2,000,000

2016 2017 2018

78,835,289 90,966,974

108,575,639

-

50,000,000

100,000,000

150,000,000

2016 2017 2018

1,063,297

1,157,427 1,231,899

900,000

1,000,000

1,100,000

1,200,000

1,300,000

2016 2017 2018

Sustainable Fisheries

1,926,303

2,101,905

2,219,952

1,700,000

1,800,000

1,900,000

2,000,000

2,100,000

2,200,000

2,300,000

2016 2017 2018

11,000 13,000

16,000

-

5,000

10,000

15,000

20,000

2016 2017 2018

2,000,355

3,668,815 3,955,701

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

2016 2017 2018

1,746,988

413,349 488,417

-

500,000

1,000,000

1,500,000

2,000,000

2016 2017 2018

Renewable Energy

Efficiency Energy

Recycling Industry

Eco Tourism

Green Building

Green Infrastructure

Sustainable Agriculture

Sustainable Fishery

Sustainable Forestry

BANKING CAPITAL MARKET NON BANK FINANCIAL

INSTITUTIONS

▪ Sustainability Bond

▪ Green Loan/Financing: syndicated loan or innovational financing that uses Green Climate Fund such as green building, ecotourism, renewable energy, efficiency energy, organic farming, sustainable infrastructure.

▪ IPO (sustainability bond, green bond/sukuk, etc)

▪ Equity Crowdfunding

▪ Pension Fund: Sustainability bond –pension fund, green investment.

▪ Financing Institution: financing to environt-friendly MSMEs.

▪ Microfinance: financing for organic farmers.

▪ Insurance: insurance for fishermen/farmers, climate risk insurance, etc.

SUSTAINABLE FINANCE PRODUCTS