Potential of and challenges to the green Sukuk for financing the green economic recovery in Indonesia

Abstract

In 2018, Indonesia issued the first sovereign green Sukuk instrument to attract more investors to finance the country’s green project. Since being issued, the instrument has shown positive progress and has even contributed to helping Indonesia deal with the COVID-19 pandemic. However, as a relatively new financial instrument, many things need to be considered in more depth, especially when viewed from the sustainability aspect of this instrument. This chapter will focus on developing green Sukuk in Indonesia and then discuss what things can be improved and what policy implications can be recommended to the government to increase the impact of this green Sukuk inclusion. The challenges that need to be addressed by the Indonesian government include the financing scope that is still centred in the Java–Bali area and allocated mostly for sustainable transportation, improving the transparency to minimise the likelihood of greenwashing, and considering more involvement of corporations to participate in green financing. To maintain and increase investor trust, the Indonesian government must conduct more comprehensive Climate Budget Tagging (CBT) and more careful risk assessments. In addition, learning from Indonesia’s experience, green instruments continue to receive positive responses from investors. The green instruments have also survived difficult conditions, such as the COVID-19 pandemic. That experience can be an illustration for other Southeast Asian countries about the performance of the green instrument to help accelerate the development of green projects in the region.