Fostering Green Finance in the Indonesian Economic Landscape
Globalfields Director Marta Simonetti led the mission and research, executed by the Frankfurt-based, development-focused consultancy Internationale Project Consulting (IPC GmbH) and commissioned by the German development cooperation agency Gesellschaft für Internationale Zusammenarbeit (GIZ), on the role of Indonesian financial institutions on the implementation of the country’s Nationally Determined Contribution (NDC).
The aim of the assignment was to derive further knowledge and inform conclusions on internal (country-wide) processes on the establishment of sectoral roadmaps in the area of green finance. We sought to analyse how those sectoral roadmaps are aligned with the national and global targets to reduce greenhouse gas emissions and support climate resilient development; the extent to which national climate and energy policy is aligned with existing regulations; and whether this regulation is conducive to the full development of green instruments and products and their uptake by the private sector.
Indonesia offer a very interesting landscape, with a fast-growing economy and significant pipeline potential for green investments in clean energy generation, sustainable infrastructure, forestry, water management, smart agriculture, and resilient development. The country has a well-developed private sector, yet liquidity and technical capacity in renewable energy generation technologies, energy efficiency, water management, sustainable transportation, land use and agriculture, are still considered high risk sectors.
Conversely, large infrastructural development in geothermal exploration and hydropower are well developed, and still call for significant governmental support, in particular as large publicly-owned conglomerates move towards sustainable infrastructure (energy generation and transmission, e-transportation, resilience in ports and transport infrastructure).
The study observed that within the green finance space in Indonesia, there is limited availability of intermediary finance, such as credit lines, and of blended finance extended concessionally. This situation is inhibiting the development of many projects because intermediation and blended finance do not necessarily result in concessional terms being extended to end-beneficiaries. Raising additional finance through government’s green bonds and green sukuk (Shariah compliant investment vehicles similar to bonds) has also increased the potential to accelerate the finance required to meet the investment needs for Indonesia to comply with its climate commitments.
Concessional finance is a very useful form of development and transition finance aimed at overcoming specific barriers to investment such as credit or technological risk, information asymmetry or lack or liberalisation in energy policy. It can be extended as concessional debt, i.e. a loan with favourable conditions such as below-market interest rates, longer grace periods and longer tenor; as concessional equity, which can be provided as first loss or in pari-passu structures, or as anchor investment in private equity, special purpose vehicles or other programmatic approaches.
In this study, we were able to advance important recommendations, ultimately targeted towards supporting the national architecture for green finance, or building a stronger business case for investing in ‘green’ instruments. Recommendations aimed to reconcile the gaps between policy and current regulation; to support institutions in advancing blended finance and support financial intermediated instruments; to support and expand the understanding of ESG and climate risk reporting, in order to embed reporting within organisations’ risk management processes.
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This case study was written by Marta Simonetti, Founder and Managing Director of Globalfields. Visit Marta's bio or contact us today to discuss this project.