Enhancing Green Financing in Indonesia with ESG Advisory

ESG Advisory for Green Financing in Indonesia

  • InCorp Editorial Team
  • 19 June 2024
  • 5 reading time

Indonesia is undergoing a transformative financial revolution. One of the initiatives comes in the form of green financing. The plan will help Indonesia to make significant strides towards a more eco-conscious future. 

Indonesia is embracing the concept and reshaping its financial landscape, focusing on environmental sustainability. This paradigm shift is opening the door to many opportunities for the environment, businesses, and investors alike. 

Understanding The Benefits of Green Financing 

Green financing can be defined as getting and using money to protect the environment and provide a fair profit for investors or lenders. It is all about funding projects that are good for the environment, whether the government or private companies run them.

Green financing will focus on investments in products and services that help the environment and activities that reduce environmental and climate harm.

In public policies, green finance also involves financing policies supporting projects or initiatives for environmental protection and reducing environmental damage.

Green finance aims to increase the flow of money from financial institutions to businesses involved in projects and activities that help the environment, all in pursuit of sustainable development goals.

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The Advantages of Green Financing in Indonesia

Indonesia has shown a solid commitment to green finance practices over a decade ago through Bank Indonesia’s (BI) regulation No. 14/15/PBI/2012, which focuses on assessing the environmental management practices of borrowers in credit distribution.

In collaboration with the Environment and Forestry Ministry, BI also signed various agreements between 2011 and 2013 to evaluate the suitability of granting credit to borrowers based on Environmental Impact Analysis (AMDAL).

The latest regulation, POJK No. 14/2023, pertains to carbon trading via carbon exchanges. This regulation aims to increase support for green financing and make it more accessible to the public.

Green financing is vital in dealing with climate change, advancing sustainable development, and helping Indonesia shift toward a low-carbon economy. It also contributes to reducing air pollution, improving public health, and creating opportunities in the green sector.

Numerous banks in Indonesia have taken the initiative to allocate substantial funds for green financing. Some of these forward-thinking financial institutions include:

1. Bank Rakyat Indonesia (BRI)

PT Bank Rakyat Indonesia Tbk (BBRI) is strengthening its commitment to sustainable green finance. In 2022, they reached IDR 694.9 trillion, equivalent to 67.5% of the bank’s total loans.

2. Bank Central Asia (BCA)

Meanwhile, the private bank owned by the Djarum Group, PT Bank Central Asia Tbk (BBCA), reported that their sustainable financial portfolio (KKUB) increased by 14.9% to IDR 183.2 trillion in 2022, or 25.4% of the bank’s total portfolio (loans and corporate bonds).

Out of this KKUB amount, BCA extended KUBL loans amounting to IDR 80.9 trillion (a 13.5% year-on-year increase), which represents 44.2% of the total KUBL loans.

3. Bank Mandiri

In 2022, PT Bank Mandiri Tbk (BMRI) demonstrated a strong commitment to sustainable financing through KKUB, disbursing a noteworthy IDR 228.7 trillion, accounting for 24.5% of Bank Mandiri’s total loans (bank only). 

This represented an impressive 11.6% year-on-year growth. BMRI’s green financing alone accounted for an impressive IDR 101 trillion.

5 Types of Green Financing

Various forms of green financing are available, each with its own characteristics and benefits.

1. Green Mortgages

Green mortgages enable lenders to offer more favorable terms to homebuyers who purchase properties with high environmental sustainability ratings or commit to improving a property’s environmental performance.

2. Green Credit Cards

Green credit cards allow consumers to direct their spending toward environmental finance, creating a long-term positive ecological impact.

3. Green Banks

Green banks function similarly to traditional banks but utilize public funds to stimulate private investments in renewable energy and other eco-friendly projects.

4. Green Loans

Green loans are used to back environmentally friendly projects like household solar panels, electric cars, energy-efficient upgrades, and more.

5. Green Bonds

Green bonds make up the majority of green funding. These are bond investments, and the proceeds are used to support various green initiatives, including renewable energy, clean transportation, conservation, and more.

The Challenges for Green Financing in Indonesia

Enhancing Green Financing in Indonesia with ESG Advisory

Since the green financing practice in Indonesia is still in its early stage of development, the market mechanisms still need to mature fully. More work must be done on both the regulatory and governance fronts.

On the regulatory side, the government should establish a clear regulatory landscape that encourages green financing and sustainable investments. 

Offering incentives, tax advantages, subsidies, or other financial policies to financial institutions and investors would encourage their involvement in environmentally friendly projects.

Moreover, the financial industry should align its green financing standards with international best practices to attract more foreign investment. 

It is also essential to raise awareness and educate businesses and the public about the benefits of green financing and its positive effects on the environment.

How ESG Advisory Can Support Green Financing in Indonesia

ESG Advisory services are designed to facilitate clients’ transition towards sustainable business models by offering sustainable financing products and top-notch advisory services. 

Moreover, guiding ESG practices can assist clients in implementing plans that promote decarbonization and uphold long-term social and economic sustainability.

Furthermore, the ESG reporting service support can help clients create a comprehensive report aligned with market standards, effectively showcasing their sustainability efforts.

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Start Implementing ESG with InCorp Indonesia

InCorp Indonesia offers ESG Advisory services to help your business thrive and stay ahead of the curve amid Indonesia’s growing demand for sustainable practice. Get in touch with our expert to kickstart your ESG investing journey by completing the form below.

Daris Salam

COO Indonesia at InCorp Indonesia

With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships.

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Frequent Asked Questions

There are three things business owners need to consider before setting up a business in Indonesia: the type of business entity, capital requirements, and regulations.

Indonesian regulations separate local companies from foreign companies. Generally, foreign-owned companies (PT PMA) have more limitations than their local counterparts (Local PT). However, to pursue more foreign direct investment in the country, the government has taken several bold initiatives to increase the ease of doing business and provide numerous attractive incentives for foreign investors.