Governing sustainable finance: insights from Indonesia

Abstract

ABSTRACT Transforming financial systems has been considered a promising avenue to ensure financial flows consistent with low carbon and climate resilient development. An important first step to do so has often been the development of sustainable finance roadmaps. Drawing on key stakeholder interviews in Indonesia in 2019–2020, this article examines how Indonesia’s sustainable finance roadmap has unfolded on the ground and investigates key challenges to its effective implementation. The study finds that there has been high procedural compliance by financial institutions through developing sustainable finance action plans and submitting annual sustainability reports to the financial regulator. However, there is considerable variation and inconsistency in interpreting what constitutes a ‘green’ project among financial institutions, enabling some financial institutions to engage in little more than tokenism. With the limited regulatory oversight currently provided, it is difficult to see how financial institutions might be incentivised to do more or how tangible sustainability outcomes can be achieved. This article proposes potential means of overcoming some of the blockages in implementing the roadmap, which include greater intervention to incentivise climate finance by Indonesia’s central bank. Key policy insights Indonesia’s sustainable finance roadmap is well underway in which most financial institutions have been compliant to sustainable finance regulations. However, with limited substantive regulatory oversight it is difficult to see tangible sustainable outcomes; Sustainable finance regulations and regulatory oversight needs to be improved through enhanced disclosure standards and risk management processes and incentives for compliance; Greater intervention by Indonesia’s central bank is needed to fast-track sustainable finance by stipulating green macro prudential regulations that incentivise or direct resources away from carbon intensive sector.