Evaluation of sustainable finance implementation in emerging markets

Abstract

This paper provides a comprehensive review of the initiative and commitment of an emerging market, Indonesia, in implementing sustainable finance to achieve a low-carbon economy and sustainable development goals (SDGs). It explores trajectories, challenges, and opportunities of sustainable finance as well as recommendations for related stakeholders for the development of sustainable finance in Indonesia. Many believed that implementation of sustainable finance, which considered multiple aspects of economic, social, and environmental risks and returns, would enable finance companies to maximize their role as a catalyst for the creation of environmentally friendly investment and a fair economic social system to achieve sustainable development goals (SDGs) more effectively. Specifically, green finance implementation as an important element of sustainable finance would create acceleration in financing for environmental preservation and climate change adaptation. Data used for evaluation is derived from selected ten financial services companies’ members of the Indonesia Sustainable Finance Initiative (ISFI) in the 2019–2022 period. It shows that despite the continuous growth in the amount of loan allocated to sustainable and green business activities, considering their loan capacity, the Indonesian financial services sector has done too little in sustainable finance, which in fact is dominated by microfinance, and very little in green finance. Regulators urgently need to formulate proper policies and incentives as well as to develop a favourable ecosystem together with related stakeholders to expedite the establishment of a well-developed and sophisticated sustainable and green finance system in Indonesia.