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Proposition for a Definition ofSustainable Finance in Indonesia

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Copyright 2014Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH- German Technical Cooperation

Badan Perencanaan dan Pembangunan Nasional (BAPPENAS) - Directorate of Rural and Urban

All rights reserved/printed in Indonesia

Wisma Bakrie 2, 5th floorJl. H.R. Rasuna Said Kav. B2Jakarta 12920T +62 21 57945740F +62 21 57945740www.giz.de/indonesia www.red.or.id

AuthorVolker BromundPT PRIME Consultancy, Jakarta

Reproduction This publication may not be reproduced in whole or in part in any form without permission from the copyright holder, except for educational or non-profit purpose, provided an acknowledgement of the source is made and a copy provided to GIZ.

Disclaimer The information contained in this publication has been derived from sources believed to be reliable. However, no representation or warranty is given in respect to its accuracy, completeness or reliability. GIZ does not accept liability for any consequences/loss to use of the content of this publication.

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ContentsINTRODUCTION 51. SUSTAINABLEFINANCE 6

1.1.WhySustainableFinanceinEmergingMarkets? 61.2.DefinitionsofSustainabilityandSustainableFinance 71.3.ExistingDefinitionsofGreenFinance 91.4.OtherRelevantDefinitionsandTermsRelatedtoSustainableFinance 101.5.SeizingOpportunitiesinSustainableBankinganditsProducts 101.6.SocialandEnvironmentalRisksinLendingOperations 141.7.Summary 16

2. INTERNATIONALSUSTAINABLEBANKINGSTANDARDS 172.1. InternationalFinanceCorporation 172.2. TheGlobalAllianceforBankingonValues 192.3. InternationalDevelopmentFinanceClub 202.4.EquatorPrinciples 222.5.Summary 23

3. SUSTAINABLEFINANCEACTIVITIESINOTHERCOUNTRIES 243.1.Bangladesh 243.2.Brazil 243.3.China 253.4.Korea 253.5.Nigeria 263.6. Thailand 263.7.Vietnam 263.8.UnitedKingdom 263.9.Summary 27

4.SUSTAINABLEFINANCEINTHEINDONESIANBANKINGCONTEXT 284.1. Introduction 284.2.PurposeoftheOJKDefinitionofSustainableFinance 284.3. Indonesia’sshifttoaGreenEconomyParadigm 294.4.SystematicApproachforQualifying‘Sustainable’Lending 304.5.ExamplesofSustainabilityintheBankingIndustry 314.6.Summary 34

5.RECOMMENDATIONS 365.1.DefinitionofSustainableFinanceforIndonesia 365.2.OperationalizetheDefinitionthroughaSustainableFinanceProjectClassification 385.3.RecommendationsforFurtherImplementation 38

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ANNEXES

I. EXISTINGGOVERNMENTREGULATIONSANDINITIATIVES I

I.I. IntegrationofOJK’sSustainableFinanceDefinitionintootherGovernmentProgramsII.II. ResponsibilitiesofRelatedMinistriesandGovernmentAgencies IV

II. GOVERNMENTCOMMITMENTSTOACHIEVEGHGEMISSIONREDUCTIONTARGETS VII.I. EnergyEfficiencyPolicy VII.II. EnergyVision25/25 VII.III. NationalEnergyConservationMasterPlan(RIKEN) VIII.IV. Examples:TextileandSteelIndustry VI

III. SETTINGOFSTANDARDSANDOFTHEBUSINESSASUSUAL(BAU)SCENARIO VII

IV. REGULATORYREQUIREMENTS/STANDARDS VIIIIV.I. EnvironmentalLicense/AMDAL VIIIIV.II. PROPER IXIV.III. EnvironmentalImpactAssessmentforLargeLoans X

V. SUGGESTEDSUSTAINABLEFINANCECLASSIFICATIONANDREPORTINGSYSTEM XI

VI. POTENTIALSUSTAINABLEFINANCEACTIVITIES XIIVI.I. Overview XIIVI.II. LenderandBorrowerSegmentation XIIVI.III. Low-emissionEnergyGenerationandSupply XIIIVI.IV. EnergyEfficiencyInvestments XIVVI.V. Critical/ProblematicVentures XVI

VII. SECTOREXAMPLESONENERGYEFFICIENCYANDRENEWABLEENERGYTECHNOLOGIES XIX

VIII. LISTOFABBREVIATIONS XXI

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FIGURES

Figure1: ScopeofResponsibilities 6Figure2: Definitions 10Figure3: KeyReasonsWhyBanksConsiderSustainabilityIssues 11Figure4: PossibleSustainableBankingProducts 13Figure5: PossibleSocialandEnviromentalRisksforBanksintheirLendingOperations 15Figure6: IFCPerformanceStandards 19Figure7: GABVPrinciples 19Figure8: IDFCModelandTerminology 21Figure9: GreenEconomyParadigm 29Figure10: RPJMN2010-2014 29Figure11: SystematicApproachforQualifyingSustainableLending 30Figure12: SustainableFinanceProjects 31Figure13: HarmonybetweenSociety,EnvironmentandEconomy 37Figure14: BankDepartmentsandtheirInvolvement 38Figure15: TypicalESCOScheme 40Figure16: Indonesia’sInitiativesonLowCarbonDevelopment/GHGEmissionReduction 44Figure17: EnergyConservation 45Figure18: RAN-GRKEmissionReductionTargetsby2020 46Figure19: EnergySavingTargetsin2025 50Figure20: EmissionReductionScenarios 51Figure21: PROPER 54Figure22: ClassificationSystemSustainableFinance 55Figure23: DevelopmentPlanofSmallScaleGenerationUtilizingGreenandNewEnergy 57Figure24: RenewableEnergyPotentialinIndonesia 58Figure25: GuidingPrincipal 60Figure26: PotentialBioenergyResources 62

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IndonesiaisoneofthebiggestemittersofGreenhouseGasEmissions(GHG)intheworld.TheGovernmentof Indonesia, here represented by the Financial ServicesAuthority (OJK), would like to encourage theIndonesianbankingandfinancesectortoplayamoreactiveroleintacklingClimateChangebyapplyingSustainable Finance instruments. Specifically investments into Renewable Energy, Energy Efficiency,sustainableproductionmethods,andthecreationof‘green’,i.e.environmentallyfriendlyproductsareinthefocusofthisinitiative.ThefocusofthisstudyistointroduceadefinitionofSustainableFinanceforIndonesia.Thisdefinitioncanbeusedtoprovideafirstpracticalguidanceonhowthrough‘SustainableFinance’therealsectorcanontheonehandbesupportedtobecome’greener’andmoresustainable.Ontheotherhandithasakeyroletoplayin‘greening’itscustomerbase–domesticcompaniesofallsizesandacrossallsectors.Thisstudyhastobeseenasastartingpointofanambitiouspoliticalprocess:theeffectiveimplementationoftherespectivefinancinginstrumentsandtoolsintheIndonesianfinancialservicesindustry.Therefore,thestudyissupposedtobefollowedbythedevelopmentofSustainableFinancePrinciples,SectorialGuidelinesandaReportingSystem,amongstothers.Anundertakingofsuchaninclusiveandcomprehensivenaturerequiresthatallstakeholdersinvolvedshareacommonunderstandingoftheterm‘SustainableFinance’.Itisthehopeoftheauthorsthatthepresentdefinitionstudycontributesalsototheseupcomingtasks.

Ontheotherhandthisstudydoesnotaimatcoveringallaspectsoftheterm‘sustainability’(economic,socialandenvironmental)duetothelimitedmandateandtimeconstraints.Itconcentratesratheronthe‘green’aspects. It also canonly tap on sectorial developments, constraints and challenges.Thiswould requireadditional,morein-depthresearch.OJKiscommittedtotakethenextstepsaccordingly.

ThestudystartswithaliteratureoverviewofthedifferentinternationaldefinitionsofGreenandSustainableFinance aswell as Sustainable Banking (Chapter 1). This is followed by an introduction of four of theinternationallymostcommon‘SustainableFinance’standardsandbenchmarks(Chapter2).Theaimistoassessthemostrelevant,currentlyappliedframeworksforbanksacrosstheglobe.Chapter3willthenlookattheprogressSustainableFinanceismakinginotheremergingeconomies.ThispreparesthegroundforChapter4:herethedifferentaspectsof‘sustainability’andGreenEconomyintheIndonesiancontextareelaboratedbeforeadefinitionofSustainableFinanceandseveralrecommendationsarepresented(Chapter5).Once‘SustainableFinance’isclearlydefinedandacommondefinitionisagreedupon,itwillalsobeimportantthateffortsoftheFinancialServicesIndustryaredocumentedandmonitored.Specialattentionwillhavetobegivenonhowmany loanswillbedirected towardsenvironmentallyandsociallysustainableventures.Forthisreasonthisstudyincludesintheannexesasuggestedclassificationandreportingsystemwhichwill allowOJKand theFinancialServices Industry tomonitor the lendingpractice towards the identifiedareasofSustainableFinance.Equallyintheannexesthemostrelevantnationalregulatoryframeworksarepresented.FinallythissectionconcludeswithacompilationofpotentialfieldsandsectorsforSustainableFinanceaswellassomemoredisputable-orcritical-areas.ThestudyhasbeencommissionedbytheGovernmentofIndonesia,representedbytheFinancialServicesAuthority,OJK.ItwaspreparedbytheRegionalEconomicDevelopmentProgram(RED)aspartofthesupporttoOJKunder theGreenEconomyComponent.RED isacollaborationbetween theMinistryofNationalDevelopmentPlanning(BAPPENAS)andGIZ(DeutscheGesellschaftfürInternationaleZusammenarbeit)onbehalfoftheGermanFederalMinistryforCooperationandDevelopment(BMZ).

With this the stakeholders follow one of the key recommendations of a long-term study conducted bythe think-tankGermanDevelopment Institute (Deutsches Institut forEntwicklungspolitik,DIE)whichwaspresentedin2013toBankIndonesia/OJK.Thestudyaskedforaprecisedefinitionofthetypeofprojectstobeincludedundertheheadingof‘GreenFinance’,whichshouldcontributetoenablingpolicy-makerstoformulatebindingstargetongreencreditshares inbanks’portfolios.Definingwhat ‘SustainableFinance’meansintheIndonesiancontextisanimportantfirststepinthisundertaking.

Introduction

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1.1.WhySustainableFinanceinEmergingMarkets?

The Financial Services Industry’s paradigm of conducting business is changing. This hasbeentruefordevelopedeconomiessincethe1980s,andit is increasinglychangingthewaythe industry is required to run itsoperations inEmergingEconomies too.The following twomainpointsaremotivating theFinancialServices Industry inemergingmarkets to reassesstheirbusinesspracticesandengage insustainability-oriented riskmanagementandproductdevelopment–besidessecuringeconomicsustainabilityoftheirownoperationsandthoseoftheirclients:

1)Pressingenvironmentalissues,and2)Theneedtoalleviatepovertyandtoprotecthumanrights.

Thescopeofresponsibilityforfinancialinstitutionsinemergingmarketsisthereforewidening–frominclusionofenvironmentalprotectionconsiderationsintheirproductandcreditdecisionsto social inclusion of underprivileged groups.Considerations of other social issues such aslaborpracticesandprotectionofindigenouspopulationsaswellasthepreservationofculturalheritageaddtothenewparadigm.

One of the monitored tendencies: localcommunities that live close to companyoperationsandplants,aswellascompaniesfinanced by banks have their own prioritiesand are emerging as ‘new regulators’.The same applies for Non-GovernmentalOrganizations(NGOs)andthebroaderpublic(beingwell-connectedviasocialmedia)whichcan seriously hamper the reputation of aninstitutionin‘notime’.

Financial services providers like bankstherefore need to consider broadening their‘traditional’ understanding of corporateobjectives, one that goes beyond a purebusinessrationale.Thefollowingtwostrategicdimensions of sustainable business needalso to be applied by the financial servicesindustryinemergingeconomies:

• Managingenvironmentalandsocialrisks. Financial institutions strengthen their portfolio by systematically evaluating environmental

andsocialrisksoflendingandinvestmentactivitiesinordertominimizefinancial,liabilityandreputationalrisksarisingfromenvironmentalandsocialchallenges.

• Identifyingandtakingadvantageofenvironmentalbusinessopportunities. Identifying opportunities for innovative product development in new areas related to

sustainability entails creating financial products and services that support commercialactivitieswithenvironmentalandsocialbenefits.Agrowingclusteroftheseopportunitieshasevolvedandincludesrenewableenergy,energyefficiency,cleanerproductionprocessesandtechnologies,carbonfinance,andsustainablesupplychains.

1. Sustainable Finance

Scope ofRespon-sibilities

Social inclusion of underprivi-

leged groups

Environ-mental

Protection

Preservation of cultural heritage

Other social issues: labor

practices, protec-tion of indigenous

people, etc.

.....

Figure 1: Scope of Responsibilities

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By effectivelymanaging environmental and social opportunities and risks together, financialinstitutionscreatelong-termvaluefortheirbusiness,ownersandshareholders.

Businessmodelsthataddressthesetwodimensionsarehelpingfinancialinstitutions• differentiatethemselvesfromcompetitors,• improvetheirreputationamongkeycustomersandstakeholders,• attractnewcapital,and• creategoodwillandsupportfromstakeholdersthroughincreasedtransparency.1

1.2.DefinitionsofSustainabilityandSustainableFinance

TheInternationalFinanceCorporation(IFC)ismemberoftheWorldBankGroup.Itpromotescompetitivemarkets and provides investment as well as advisory support to private sectorclients,notatleastfromthefinancialservicesindustry.Havingaglobalsustainabledevelopmentmandate,IFCcanbeseenasakeyactorforthesocialization,butalsothedefinitionofterms,understandingsandpractices.

AccordingtotheIFC,sustainabilityisaboutensuringlong-termbusinesssuccesswhilecontributingtowardeconomicandsocialdevelopment,ahealthyenvironment,andastablesociety.

IFC’sdefinitionofsustainability,asappliedtofinancialinstitutions,encompassesfourdimensionsofgoodbusinessperformance:2• Thefinancialsustainabilityofthefinancial institutionanditsclient-companies,sothatthey

cancontinuetomakealong-termcontributiontodevelopment.• Theeconomicsustainabilityoftheprojectsandcompaniesthefinancialinstitutionfinances,

throughtheircontributiontohosteconomies.• Environmentalsustainabilitythroughthepreservationofnaturalresources• Socialsustainability through improved livingstandards,poverty reduction,concern for the

welfareofcommunities,andrespectforkeyhumanrights.

Theseconsiderations,takentogether,aimtocaptureafullerrangeoffactorsthatinfluencethedecisions, activities, products, and services of financial institutions, including the social andenvironmentalimpactsoftheirwork.

TheGlobalAllianceforBankingonValues(GABV)3isaNetherlands-basedfoundationwithanestablishedcharter,madeupof theworld’s leadingsustainablebanks, fromAsia,Africa,Australia,LatinAmericatoNorthAmericaandEurope.Members includemicrofinancebanksinemergingmarkets,creditunions,communitybanksandsustainablebanksfinancingsocial,environmentalandculturalenterprise.

Itsdefinitionofsustainablebankingisasfollows:

“Sustainablebankingcanbedefinedasadecisionbybankstoprovideproductsandservicesonly tocustomerswho take intoconsideration theenvironmentalandsocial impactsof theiractivities.”4

Agroupofsustainablebanks,allmembersofGABV,havecontinuedtosuccessfullyfinancethe‘real’economythroughbusinessmodelsbasedonthefollowing‘PrinciplesofSustainableBanking’:5

GABVPrinciplesofSustainableBanking:1.Triplebottomlineapproachattheheartofthebusinessmodel;

1) See IFC on http://firstforsustainability.org/sustainability/sustainability-and-finance, accessed on 13 September 2014.

2) IFC BANKING ON SUSTAINABILITY (2007): ‘Financing Environmental and Social Opportunities in Emerging Markets’, http://www.ifc.org/wps/wcm/connect/9486d980488658f8b7b2f76a6515bb18/Banking_on_Sustainablity_Launch.pdf?MOD=AJPERES&CACHEID=9486d980488658f8b7b2f76a6515bb18, accessed on 15 September 2014.

3) See: www.gabv.org, accessed on 12

September 2014.

4) Global Alliance for Banking on Values (2013): ‘Real Banking for the Real Economy - Comparing Sustainable Bank Performance with the Largest Banks in the World’, http://www.gabv.org/wp-content/uploads/New-13-5923_GABV_report_Washington_07mvd1.pdf, accessed on 13 September 2014.

5) Ibid.

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6) University of California, Berkeley: ‘Sustainable Finance’, http://responsiblebusiness.haas.berkeley.edu/programs/sustainablefinance.html, accessed on 16 June 2014.

7) Gerster Consulting: ‘Sustainable Finance: Achievements, Challenges, Outlook’, http://www.gersterconsulting.ch/docs/sustainable_finance_final_11.02.10.pdf, 2012, accessed on 18 June 2014.

8) Forum for the Future (2002): ‘Financing the Future: The London Principle of Sustainable Finance’, www.forumforthefuture.co.uk, accessed on 18 June 2014.

9) Höhne/Khosla/Fekete/Gilbert (2012): Mapping of Green Finance Delivered by IDFC Members in 2011, Ecofys.

2.Grounded in communities, serving the real economy and enabling newbusiness of theireconomicactivitiesandtheriskinvolved;

3.Long-termrelationshipwithclientsandadirectunderstandingoftheireconomicactivitiesandtheriskinvolved;

4.Long-term,self-sustaining,andresilienttooutsidedisruptions;5.Transparentandinclusivegovernance;and6.Alltheseprinciplesembeddedinthecultureofthebank.

Otherdefinitionsarelessinstitution-focusedandconcentrateonSustainableFinanceinstead.Withthisanewtermaddstheinternationalstage,whichsofarprimarilywascoveredby‘GreenFinance’(see1.3.).

RenownedUniversityofCalifornia,Berkeleyforinstanceprovidesthefollowingdefinition:

“Sustainable finance is thepractice of creating economic and social value through financialmodels,productsandmarketsthataresustainableovertime.”6

Anadditionalaspectisintroducedbythedefinitionofarelevantinternationalconsultingfirm:

“Sustainablefinanceisfrequentlydefinedasaddressingenvironmental,social,andgovernance(ESG) impactsof financial services. Inaddition, thesustainability concept includesa longertermfinancialdimensionandanethicaldimension.”7

Anotherdefinitionofaprivate,UK-basedconsultancy–inthiscasewithaNGObackground–adds‘justice’asanothercomponent:

“Sustainablefinanceisdefinedastheprovisionoffinancialcapitalandriskmanagementproductstoprojectsandbusinessesthatpromote,ordonotharm,economicprosperity,environmentalprotection,andsocialjustice.”8

1.3.ExistingDefinitionsofGreenFinance

Comparedto thetermofSustainableFinance–seetheprevioussection- thediscourseonGreenFinance ismore established and generated a number of detailed and partly applieddefinitions.Amongthemanydefinitionswhichvarysignificantlythefollowingarelistedbelowforcomparativepurposes:

ResearchersHöhneetal.(2012)defineGreenFinancebyanticipatingalreadysocialeffectsofenvironmentalimpacts:

“Greenfinanceisabroadtermthatcanrefertofinancialinvestmentsflowingintosustainabledevel-opmentprojectsand initiatives,environmentalproducts,andpolicies thatencouragethe development of amore sustainable economy.Green finance includes climate financebut isnot limitedto it. Italsorefers toawiderrangeofotherenvironmentalobjectives, forexample industrial pollution control, water sanitation, or biodiversity protection. Mitigationandadaptationfinanceisspecificallyrelatedtoclimatechangerelatedactivities:mitigationfinancialflowsrefer to investments inprojectsandprograms thatcontribute to reducingoravoiding greenhouse gas emissions (GHGs) whereas adaptation financial flows refer toinvestmentsthatcontributetoreducingthevulnerabilityofgoodsandpersonstotheeffectsofclimatechange.”9

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Others,likeZadekandFlynn(2013),highlighttheprojectcycleanditscostsintheirdefinition,makingadistinctionbetweencapitalinvestmentandthegreenfinancecycleagain:

“Greenfinanceisoftenusedinterchangeablywithgreeninvestment.However,inpractice,greenfinanceisawiderlensincludingmorethaninvestmentsasdefinedbyBloombergNewEnergyFinanceandothers.Mostimportantisthatitincludesoperationalcostsofgreeninvestmentsnotincludedunderthedefinitionofgreeninvestment.Mostobviously,itwouldincludecostssuchasprojectpreparationandlandacquisitioncosts,bothofwhicharenotjustsignificantbutcanposedistinctfinancingchallenges.”10

In a recent definition international consultancy giant PricewaterhouseCoopers (PwC) putsemphasisonthe(banking)institutionalaspectsofGreenFinance:

“For the banking sector, green finance is defined as financial products and services, underthe con-siderationof environmental factors throughout the lendingdecisionmaking, ex-postmonitoringandriskmanagementprocesses,providedtopromoteenvironmentallyresponsibleinvestmentsandstimulatelow-carbontechnologies,projects,industriesandbusinesses.”11

Inaveryrecentandstillunpublishedstudy,whichpartlyreferstothecaseofIndonesia,Germanthink-tankDeutschesInstitutfürEntwicklungspolitik(DIE)comesforwardwithabroaddefinition:

“Accordingtoourdefinition,[GreenFinance][…]comprisesallformsofinvestmentorlendingthattakesintoaccountenvironmentalimpactandenhancesenvironmentalsustainability.AkeyelementofGFissustainableinvestmentandbanking,whereinvestmentandlendingdecisionsaretakenonthebasisofenvironmentalscreeningandriskassessmenttomeetenvironmentalsustainabilitystandards.”12

Thisrequiresfurtherdefiningthemaintermswhichareusedinthepublicdiscussionandalsointhisstudy(see1.4.).

Nonetheless,thefollowinginterimconclusionscanbedrawn:• There are different operational definitions of ‘green’ in place for different economic and

governmentactivities.

• Thereappearstobeasizeablecommonintersectionofthevariousdefinitionsintermsofsomesectors (e.g. renewable energy), commodities (e.g. carbon or renewable energy credits),services(e.g.wastemanagement)andtechnologies(e.g.toenhanceenergyefficiency).

• There are someareas ofmajor controversy (e.g. nuclear and large-scale hydro energy),changingconsensus(e.g.biofuels,biomass,shalegas),ambiguity(e.g.agriculture,greenIT,financialservices,waste)oruncertaintyhowtodealwithe.g.biodiversityandconservation.

• Defining‘greenness’appearseasierforspecificgoodsorservicesthanfortechnologiesandprocessesofmakingcompaniesortheeconomyingeneral‘greener’.

• Itoftenremainsunclearastowhatthe(implicitorexplicit)metricfor‘greenness’is,orshouldbe.Thesameistruefortheassessmentoftheactualimpact.

• Hence,forthisstudyGreenFinancecouldbedefinedinaratherinclusivemannerasfollows:13‘GreenFinanceincludesallinstruments,productsandserviceswhichareprovidedbytheFinancialServicesIndustry(includinginsurancecompaniesandnon-bankFinancialInstitutions)andarerelatedtoaGreenEconomyanditsproductsandservices.’

10 Zadek and Flynn (2013): South-Originating Green Finance: Exploring the Potential, The Geneva International Finance Dialogues, UNEP FI, SDC, and iisd.

11 PricewaterhouseCoopers Consultants (2013): ‘Exploring Green Finance Incentives in China’.

12 Böhnke/Eidt/Knierim/Richert/ Röber/Volz (forthcoming): ‘How to Make Green Finance Work - Empirical Evidence from Bank and Company Surveys’, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE).

13 It should not be concealed that Bank Indonesia provided at an earlier occasion an ad interim definition of Green Finance, see Chapter 4.2.

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1.4.OtherRelevantDefinitionsandTermsRelatedtoSustainableFinance

As seen earlier there is a broad range of very different definitions, which have often to beseenandreadagainstthebackgroundoftheissuinginstitution.Forthepresentstudy–andinadditiontothedefinitionofGreenFinance-thefollowingthreemaintermsareusedandwilllaterleadtoadefinitionofSustainableFinance:

GreenInvestments Investments which are done in the areas of Renewable Energy, Energy Efficiency

and other investments towards a Green and Sustainable Economy. It describes the investment itself without any consideration of how it is funded. For that reason it is a broad definition.

In case Green Investments are funding by the Finance Industry - e.g. via loans - the lending will be defined as ‘Green Lending’.

The term Green Investment it also used in the context of investment into those assets such as stocks, bonds or investment funds which are considered being ‘green’.

GreenLending Green Lending is the provision of loans (investment loans and working capital) which

support ‘green’ investments.

GreenBanking Green Banking is not only the provision of specialized products to support a green

economy but also the activities of the banking industry themselves which reduces the GHG footprint. Paperless account statements, mobile banking, investments in more energy efficient bank branches and the likes are part of Green Banking.

Figure 2: Definitions

1.5.SeizingOpportunitiesinSustainableBankinganditsProducts14

Accordingtoa2005IFCsurvey,reputationandbrandinghasbecomethetopreasonformanybanks to integratesustainabilityconsiderations into theirmanagementpractices.68%of theparticipantsidentifiedtheneedtoincreasetheircredibilityandreputationasthemainreasontoconsidersocialandenvironmentalissues.64%oftherespondentsidentifiedinvestordemandasacriticalfactor:15

Figure 3: Key Reasons Why Banks Consider Sustainability Issues

Key Reasons Why Banks Cpnsider Sustainability Issues(Percent of respondents)

Increased credibility and gain reputation

Demand bay investors

Lower risk and better returns

Increased value to stakeholder

Banks/clients facing liability claims

Potential for business debelopment

Deman by clients

Non-performing loan expertise

68

64

52

28

20

20

16

16

0 10 20 30 40 50 60 70

14 IFC BANKING ON SUSTAINABILITY (2007): ‘Financing Environmental and Social Opportunities in Emerging Markets’, http://www.ifc.org/wps/wcm/connect/9486d980488658f8b7b2f76a6515bb18/Banking_on_Sustainablity_Launch.pdf?MOD=AJPERES&CACHEID=9486d980488658f8b7b2f76a6515bb18, accessed on 15 September 2014.

15 Excerpts available on http://www.ifc.org/wps/wcm/connect/9486d980488658f8b7b2f76a6515bb18/Banking_on_Sustainablity_Launch.pdf?MOD=AJPERES&CACHEID=9486d980488658f8b7b2f76a6515bb18, accessed on 31 July 2014.

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Apparentlycompliancewithgovernmentregulations,althoughimportant, isnolongerthetopdriver.Instead,otherconsiderationsgainimportance:- increasedvaluetoshareholders- lowerriskandbetterreturnsand- clientandmarketdemand.

For financial institutions, the process of continual improvement means integrating betterstandardsaswellasexpandingtheviewofwhatgenerateslong-termvalueforthemselves,fortheirclients,andforthesocietyatlarge.

Thismovetoachievegreaterlong-termvalueisexpectedtobedrivenfromboth:insideandoutsidefinancial institutions.Banks thatuse thesestrategieswill gainacompetitiveedge.Theywillalsostrengthentheirpositionbycontributingtothemacroeconomicdevelopmentofthecountriesorregionsinwhichtheyoperate,facilitatingtheirintegrationintotheinternationalfinancial community, and serving asmodels of best sustainability practice that others canfollow.

Oneofthe‘outside’driverscanbearegulatorsuchasOJKdirectingtheindustrytoapplycertainstandardsandtocreatealevelplayingfieldforthewholeFinanceIndustry.

Also in emerging markets, financial institutions increasingly recognize that sustainability-relatedproductsandservicescanexpandtheirportfolio,differentiatethemfromcompetitors,andimprovetheirreputationamongcustomersandstakeholders.Teamsofspecialistbankershaveemergedwhosemandate is to find innovativewaysof financingprojects or creatingproductswithsignificantsocialandenvironmentalbenefits,whilealsomeeting theirbanks’profittargets.

In a nutshell, banks in emerging economies can transform sustainability risks intoopportunitiesby:• Identifyingnewpotentialmarketsinsustainableareasandchannelinginvestmenttothem,

therebygeneratingadditionalrevenuestreams,

• Developingbusinessinnewareaswithexistingclientsbycross-sellingsustainability-relatedbankingproductsandadditionalservices,andalsogeneratingadditionalrevenues,

• Undertakingdetailedsustainabilityriskassessmentsoflargeprojectsinvarioussectors,

• Financingonlythoseprojectsthatadequatelytakesocialandenvironmentalconsiderationsintoaccount,therebyreducingcreditrisk,

• Achievingmarketdifferentiationbydevelopingknowledgeandin-housecapacityinevaluatingthe potential of sustainability-related products, thereby attracting customers seekingprofessionaladvisoryservicesinsustainabilityareasinadditiontofinancing,

• Enhancingthebanks’reputationandbrandvaluebysupportingsustainabledevelopment,therebymeetingahighpriorityforgovernmentsandinternationalorganizations,andperhapsattractinginternationalfinancing,and

• Takingadvantageofinternationalmarket-basedregulatorymechanisms,suchastheKyotoProtocolandtheConventiononBiologicalDiversity.

Accordingtothe‘IFCBankingonSustainability’16reportsomeofthemostprominentbusinessopportunitiesinthebankingindustryareinthefourfollowingfast-growingareas:

16 IFC BANKING ON SUSTAINABILITY (2007): ‘Financing Environmental and Social Opportunities in Emerging Markets’, http://www.ifc.org/wps/wcm/connect/9486d980488658f8b7b2f76a6515bb18/Banking_on_Sustainablity_Launch.pdf?MOD=AJPERES&CACHEID=9486d980488658f8b7b2f76a6515bb18, accessed on 15 September 2014.

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Examples

Products and Services on the Depositors Side

□ □ □ n n

‘Environmental’ affinity credit cards and savings account; social and environmental investment funds. These products are usually targeted in specific environmentally/socially sustainable aspects or areas.

Products and Services on the Borrowers Side

Loans with a Sustainable Focus

n n n n nLoans to promote sustainable energy, energy efficiency, or biodiversity conservation or to finance sustainable supply chain management.

Leasing with a Sustainable Focus

n n n □ □Leasing for sustainable projects, such as for equipment that is energy-efficient or is used to generate renewable energy (solar panels, micro hybrid turbines).

Carbon Finance n n n □ □

Projects in various areas, such as promoting renewable energy to displace fossil fuels; switching from fuels with high GHG intensity, which reduce green how gas emissions

Microcredit □ □ □ □ n

Micro loans or micro leasing to underprivileged groups (such as women, indigenous people, people in rural areas); banks can corporate with NGOs and microfinance organizations to channel resources to these areas more effectively.

Housing Finance n □ □ □ n

Affordable housing programs, ‘green’ mortgages that provide financing to build or renovate homes in a way that increases efficiency of energy use; mortgages to small businesses or individual entrepreneurs.

Sustainable Supply Chain Finance

□ □ n n □

Financing buyers of or suppliers of various products (coffee, timber, non-timber forest products) at different stages in the supply chain (including SMEs) to facilitate more sustainable practices in agriculture, forestry, and other sectors, and to protect biodiversity.

Securitization in Sustainable Areas

□ n □ n □

Securitization of projects that are low-profit allows banks to cover previously uninsurable risks using the capital market (alternative risk financing) or to bring forward future cash flows (asset-backed securitization)

Environmental/Social Liability Insurance

n n n n □Insurance coverage for certain types of social and environmental liabilities/damage

Advisory Services n n n n n

Strengthening organizational capacity of bank’s clients and governments to meet their needs for information and knowledge related to social and environmental sustainability. This is particularly important for SMEs

Community Programs □ □ □ n n

Charitable donations; cultural and social finds to support children, education, sports, environmental protection, and the like.

• sustainableenergy,• cleanerproduction,• biodiversityconservation,and• bankingservicestolow-income,underservedgroups.

Mostoftheseinvestmentprojectscanbesuccessfullycapturedwithregularbankingproducts,suchasloans,projectfinance,orinsurance.Banks,asdeposit-takinginstitutions,candesignspecificfinancialproductsontheliabilitysidetomeetthegrowingdemandfromcustomersandothers.Sustainability relatedbankingproductson the investmentsidearesometimesreferred toas‘greeninvestment’or‘social(ethical)investment’.

PossibleSustainableBankingProducts17

17 Ibid.

14

Example:GreenBonds18

Green Bonds enable capital-raising and investment for new and existing projects withenvironmentalbenefits.RecentactivityindicatesthatthemarketforGreenBondsisdevelopingrapidly.TheGreenBondPrinciples (GBP)arevoluntaryprocessguidelines that recommendtransparency and disclosure and promote integrity in the development of the Green BondmarketbyclarifyingtheapproachforissuanceofaGreenBond.

TheGBPareintendedforbroadusebythemarket:• theyprovideissuersguidanceonthekeycomponentsinvolvedinlaunchingacredibleGreen

Bond,• they aid investors by ensuring availability of information necessary to evaluate the

environmentalimpactoftheirGreenBondinvestments,and• they assist underwriters by moving the market towards standard disclosures which will

facilitatetransactions.

TheGBPincludeguidelinesfor:• UseofProceeds,• ProcessforProjectEvaluationandSelection,• ManagementofProceeds,and• Reporting.

ThereisdiversityofopiniononthedefinitionofGreenProjects;thereforeitisnottheintentoftheGBPtoopineontheeligibleGreenProjectcategories.TheGBPrecommendissuerscommunicate their Use of Proceeds categories clearly so that investors can determinethe bond’s consistency with their investment strategy. The transparency and disclosurerecommendedbytheGBPareintendedtoprovidetheinformationalbasisforthemarkettoincreasecapitalallocationtoenvironmentallybeneficialpurposeswithoutanysingleauthorityorgatekeeper.

Thefourbanksthatservedasadraftingcommitteefor thePrincipleswillpropose in2014agovernanceprocessthatwillallowfordiversestakeholderinputintotheGBP.Itisanticipatedthatanindependentthirdpartywillbedesignatedtoserveasasecretariatwhoseadministrativeduties will include facilitating information exchange with issuers, investors, underwriters,and other stakeholders such as non-profit environmental organizations, non-governmentorganizations,academicsandotherthoughtleaders.

TypesofGreenBonds

Green Bonds are instruments in which the proceeds will be exclusively applied (either byspecifying Use of Proceeds, Direct Project Exposure, or Securitization) towards new andexistingGreenProjects;thisisdefinedhereasprojectsandactivitiesthatpromoteclimateorotherenvironmentalsustainabilitypurposes.

Therearecurrently four typesofGreenBonds (additional typesmayemergeas themarketdevelopsandthesewillbeincorporatedinannualGBPupdates):

• GreenUseofProceedsBond:astandardrecourse-to-the-issuerdebtobligationforwhichtheproceedsshallbemovedtoasub-portfolioorotherwisetrackedbytheissuerandattestedtobyaformalinternalprocessthatwillbelinkedtotheissuer’slendingandinvestmentoperationsfor

18 GREEN BONDS (2014): ‘Green Bond Principles, Voluntary Process Guidelines for Issuing Green Bonds’, http://www.ceres.org/resources/reports/green-bond-principles-2014-voluntary-process-guidelines-for-issuing-green-bonds/view, accessed on 12 August 2014.

15

projects.Pendingsuchinvestment,itisrecommendedthattheissuermakeknowntoinvestorstheintendedtypesofeligibleinvestmentsforthebalanceofunallocatedproceeds.

• GreenUseofProceedsRevenueBond:anon-recourse-to-the-issuerdebtobligation inwhichthecreditexposureinthebondistothepledgedcashflowsoftherevenuestreams,fees,taxesetc.,andtheUseofProceedsofthebondgoestorelatedorunrelatedGreenProject(s).Theproceedsshallbemovedtoasub-portfolioorotherwisetrackedbytheissuerandattestedtobya formal internalprocessthatwillbe linkedto the issuer’s lendingandinvestment operations for projects.Pending such investment, it is recommended that theissuermakeknowntoinvestorstheintendedtypesofeligibleinvestmentsforthebalanceofunallocatedproceeds.

• GreenProjectBond:aprojectbondforasingleormultipleGreenProject(s)forwhichtheinvestorhasdirectexposuretotheriskoftheproject(s)withorwithoutpotentialrecoursetotheissuer.

• GreenSecuritizedBond:abondcollateralizedbyoneormorespecificprojects,includingbutnotlimitedtocoveredbonds,ABS,andotherstructures.Thefirstsourceofrepaymentisgenerallythecashflowsoftheassets.Thistypeofbondcovers,forexample,asset-backedsecuritizationsofrooftopsolarPVand/orenergyefficiencyassets.

ThecornerstoneofaGreenBondistheutilizationoftheproceedsofthebond.ForaGreenUseofProceedsBondoraGreenUseofProceedsRevenueBond,theissuershoulddeclaretheeligibleGreenProjectcategories(includingtypesofinvestmentsmadeindirectlythroughfinancial intermediaries) in theUseofProceedssectionof the legaldocumentation for thesecurity.TheGBPrecommends thatalldesignatedGreenProjectcategoriesprovideclearenvironmental benefits that canbedescribedand–whenever feasible - quantifiedand/orassessed.

There are several categories and sets of criteria defining eligibleGreenProjects already inexistenceinthemarket.19

TheGBPrecognizeseveralbroadcategoriesofpotentialeligibleGreenProjectsfortheUseofProceedsincludingbutnotlimitedto:• Renewableenergy• Energyefficiency(includingefficientbuildings)• Sustainablewastemanagement• Sustainablelanduse(includingsustainableforestryandagriculture)• Biodiversityconservation• Cleantransportation• Cleanwaterand/ordrinkingwater.

1.6.SocialandEnvironmentalRisksinLendingOperations20

IntheabovementionedIFCstudytheconclusionofasurveyinthebankingindustrywasthefollowing:

“Mostbanksrankedtherisksofnegativepublicityandlossofreputationfromtheirassociationwithsociallyandenvironmentallyproblematicactivitiesasamoreimportantlong-termriskthancreditrisk.”21

19 Ibid.

20 IFC BANKING ON SUSTAINABILITY (2007): ‘Financing Environmental and Social Opportunities in Emerging Markets’, http://www.ifc.org/wps/wcm/connect/9486d980488658f8b7b2f76a6515bb18/Banking_on_Sustainablity_Launch.pdf?MOD=AJPERES&CACHEID=9486d980488658f8b7b2f76a6515bb18, accessed on 15 September 2014.

21 Ibid.

16

Risks for Clientsoperational issue, legal issues, isnurance, unfair labor practices (e.g. health, safety, child labor)

Possible social and environmental risks for bank in their lending operations

Direct risk

Lenders liability for social or

environmental damage caused by

client

Reputational risknegative publicity

Market riskreduced value of

coleteral

Credit riskredused repayment

capacity

Indirect riskrisk from financial and operational conditions of a client

Ris

k fo

r ba

nks

Consequencesloss of assets, reduced profit, damage to reputation

RisksforBankClients22

Inessence,bankssocialandenvironmentalrisksarethoseoftheirclients.Toavoidtheserisks,banksneedtoensurethattheirclients’financialandoperationalsustainabilityisnotunderminedbyadverseimpactsonenvironmentorsociety.

Examplesofsuchrisksare:• Operationalrisksoftheirclientscausedbychangingexternalenvironmentalconditions,such

asfarmsgoingbankruptbecauseofdeteriorationofwaterresources;• social conditions, such as higher labor costs related to health care/increased insurance

expensesandexpensesforlaborsafety;or• higherstaffturnoverduetohealthandenvironmentalissues.

Operational risks can trigger themost significant decreases in a client’s profits and thus itsprospectsforstayinginbusiness—andwillaffectitsabilitytorepayaloan.Forexample,ifaclientislosingmarketsharebecauseitsproductsdonotmeetthegrowingdemandformoreenvironmentallyfriendlyproducts,thatclientmightnotbeabletosustainitsprofits.Socialandenvironmentalrisksforbanksdependtoagreatextentonwhatindustrysectorstheirborrowersoperate in, and the nature of the client base that a bankworkswith (whether large projectfinanceorsmallerborrowers,forexample).

The bottom-line of this for future risk assessments is: (international) banks pay/should payincreasingattentiontoreputationalrisks.Oftenthesearerelatedtoenvironmentalandsocialimpactsofinvestmentdecisionswhichinvolvebanksandfinancialserviceproviders.

HowthisstatementcanbeappliedtotheIndonesianbankingcontextwillbeshortlyelaboratedinChapter4below.

1.7.Summary

Besides the ‘globalization’ofenvironmentaldamagesand its impactsweseerapidchangesinclientandconsumerbehavior.New(social)mediatriggeranincreasedglobaltransparency.Publicopinion–consumers, interestgroups,politicaldecision-makersandbusinesses -can

Figure 5: Possible Social and Environmental Risks for Banks in their Lending Operations

22 IFC BANKING ON SUSTAINABILITY (2007): ‘Financing Environmental and Social Opportunities in Emerging Mar-kets’http://www.ifc.org/wps/wcm/connect/9486d980488658f8b7b2f76a6515bb18/Banking_on_Sustainablity_Launch.pdf?MOD=AJPERES&CACHEID=9486d980488658f8b7b2f76a6515bb18, accessed on 15 September 2014.

17

have a huge influence and impact on companies, products and services. These opinionstypicallyaredrivenbyethical,environmentalandsocialmotivationsandissues.TheFinancialServicesIndustryhastoreacttothatbyadjustingtheirproductsandserviceswhichareoffered.Italsohastofinetunetherelatedriskmanagementtoolssothattheirfinancialperformanceandbrandisnotnegativelyimpactedbysuddentrendsandeventswhichoccur.

Therearehugeopportunitiesfor institutionswhichseriously identifythese.Thedevelopmentandintroductionofnewproducts,servicesandsectorsaspartoftheireverchangingbusinessmodel (e.g. renewable energy financing or energy efficiency financing) can be seen as aprerequisiteforfuturebusinesssuccess.

But these trends bear also new risks where Financial Institutions have to adapt to. Thereputationandstandingofitsbrandisoneofthemajorassetsofeachcompany.Withoutmaking‘sustainability’tooneofthekeycomponentsofitsbusinessstrategythecompanyismissingopportunitiesand–evenworse–toleratingahugeriskonitsfutureperformance.

Forthedefinitionpresentedbythisstudythefollowingcanbeconcluded:Theessenceofmostdefinitions is thementionedbalanceof ‘People’, ‘Profit’and ‘Planet’.23IFCadds amoremacro-economic perspective to the tri-polarmodel.Hence, a definition ofSustainableFinanceneedstobeatleastascomprehensiveastheabovedescribedones,aimingatreconciling,establishingharmonybetweentheeconomy,thesocietyandtheenvironment.The term ‘economy’ in this context includes corporate profitability: only commercially viableprojectssecureeconomicsustainabilityofbankingoperations.

ThechapterproposesthreeinstrumentaldefinitionsofGreenInvestments,GreenLendingandGreenBanking.ItalsosuggestsapreliminarydefinitionofGreenFinance,onethat israthergenericasitisdeviatedfromtheotherterms.

Beyond that it becomes apparent that an applicable, meaningful definition of SustainableFinancefortheIndonesiancontextrequiressuggestionsandguidelinesfortheimplementationandexecutionofSustainableFinanceproductsandservices.Otherwisehaving ‘SustainableFinance’willremainaratherpoliticalandgeneralobjective.OneinstrumentforacceleratingtheshifttoaGreenEconomycouldbeGreenBondswhichprovidelong-termrefinancingforGreenInvestments.

23 See also Chapter 4.3.

18

Financial institutionsare increasinglyadoptingglobalstandardsforenvironmentalandsocialriskmanagementandfordevelopingSustainableFinanceproducts.TherearealreadyanumberofInternationalstandardsrelatedtosustainablebanking,i.e.aimingatguidingoperationsofthebankingindustry.

Following are some examples of voluntary international sustainability mechanisms for thefinancesector:24

Thefirstfourstandards/principles(leftcolumn)willbeelaboratedfurtherastheyarethemostrelevantfortheOJK’sSustainableFinanceInitiativeandIndonesianfinancialservicesindustry.

2.1.InternationalFinanceCorporation

With regards toSustainableBanking the IFC isengaged incontributing through itsdifferentinstrumentsto• energyefficiency,• renewableenergy,• sustainableagriculture,• greenbuildingsand• climatechangeadaptation.

ForIFCinvestments,climatefinancingincludesloans,equity,guaranteesandriskmanagementproducts, including investmentsmade indirectly through financial intermediaries. Its climate-relatedengagementsaresegmentedbytheIFCinthreecategorieswhichareshortlydescribedbelow:Mitigation,Adaptation,and‘SpecialClimate’.25

Mitigation26

TheIFCdefinesthat“mitigationimplieseitherreductioninemissionsofGHGsintotheatmosphereorabsorptionofGHGsfromtheatmosphere.”GHGreductionscanincludeareductioninGHGemissions currently beingemitted, or a reduction inemissionsbroughtaboutby theprojectcomparedwithacrediblebusiness-as-usualalternative,orsequestrationofemissionscurrentlyin theatmosphere.Theability tocalculate, report,andverify thismitigation isaprerequisitefor this project category.GHG reductions aremeasured against a business-as-usual (BAU)baselineasdescribedincalculationguidancenotes.

FortrackingtheseGHGreductions,IFCfollowstheGreenhouseGasProtocol’sProjectProtocolforterminologyandapproach,namely:

1)Relevance:Usedata,methods,criteria,andassumptionsthatareappropriatefortheintendeduseofreportedinformation,

2)Completeness: Consider all relevant information that may affect the accounting andquantificationofGHGreductions,andcompleteallrequirements,

3)Consistency:Usedata,methods,criteria,andassumptionsthatallowmeaningfulandvalidcomparisons,

2. International Sustainable Banking Standards

• IFCPerformanceStandards • UNEPFinanceInitiative• EquatorPrinciples • UNPrinciplesofResponsibleInvestments• GABV • UNGlobalCompact• IDFC • CarbonDisclosure.

24 Julia Polonskaya, Mikhail Babenko (2012): ‘Best Practice Guide on Sustainable Finance: A Practical Toolkit for Russian Financial Sector. WWF Sustainable Finance Programme report’, Moscow/Berlin.

25 IFC CLIMATE BUSINESS DEPARTMENT VERSION: 2.2 UPDATED: APRIL 2014’, http://www.ifc.org/wps/wcm/connect/534495804a803b32b266fb551f5e606b/IFC_Climate_Definitions_2013.pdf?MOD=AJPERES, accessed on 31 July 2014.

26 Ibid.

19

4)Transparency:ProvideclearandsufficientinformationforreviewerstoassessthecredibilityandreliabilityofGHGreductionclaims,

5)Accuracy:Reduceuncertaintiesasmuchasispractical,and6)Conservativeness:Useconservativeassumptions,values,andprocedureswhenuncertainty

ishigh.

DirectMitigationactivitiesresultinGHGreductionsattributabletochangesinanIFCclient’soperationasaresultofIFCinvestmentsoradvice.Throughinvestments,IFCfinancesprojectsresultinginGHGreductions.Throughadvisoryservices,clientscontractIFCtoprovidetechnicalassistancetotheiroperationsleadingtoGHGreductions.BotharesubjecttoexanteappraisalofGHGemissionsandotherenvironmentalandsocialimpactsaswellasexpostverificationuponprojectcompletionandoperationtoensureprojectobjectivesweremet.

Projectcategoriesthatqualifyasdirectmitigationareasfollows:27

1)Renewableenergygeneration(RE)ofelectricaland/orthermalenergyfromseveralsources,2)Energyefficiency(EE),3)Agriculture,Forestry,andLandUse(AFOLU),4)WasteManagement,5)Transport,6)OtherMitigation,and7)CarbonMarkets.

Adaptation28

Adaptation implies reduction in thevulnerabilityofhumanornaturalsystems to the impactsof climate changeand climate variability related risksbymaintainingor increasingadaptivecapacityandresilience.

AdaptationprojectsareIFCinvestmentsoradvisoryservicesthatincorporateinformationaboutclimatechangerisksintodecision-making(exante)and,bydirectlyaddressingidentifiedrisks,vulnerabilities,orimpacts:i. reducetherisk,exposureorsensitivitytoclimatechange,ii. increaseclimateresilience,iii.build problem solving capacity to develop responses to identified risks, vulnerabilities or

impacts,andiv.addressimpactsdirectlylinkedtoclimatechange,

whileavoidinginadvertentincreasesinvulnerabilityofsystemsorsocialgroups,andavoidingplacingassetsorsystemsinharm’sway.Itfollowsfromthedefinitionofadaptationthatgooddevelopmentinandofitselfoftencontributestoadaptation.Toavoidmislabelingofalldevelopmentactivitiesasadaptation,whichbynatureiscontext-specific,activitieswillberecordedasadaptationifaproject’sappraisalandsupportingdocumentscontainidentificationofspecificandrelevantclimatechange-relatedrisksandvulnerabilities,andhowtheproposedmeasureswilldirectlyaddressthem.

Specialclimate29

SpecialClimateprojectsareactivitiesthatcontributetomitigation,butforwhichnoIFC-approvedGHGreductioncalculationmethodologyexists.TheseactivitiescontributetoGHGreductionsyetactualGHGreductionsareneithereasilynorcrediblyquantifiable:

27 See also for more details: ibid.

28 Ibid.

29 Ibid.

20

1)Mitigationactivities(1-7,above)forwhichinformationisavailabletodeterminethataGHGreductionwillresultyetnotsufficienttoquantifytheactualamount,

2)ActivitiesthatsupportmitigationactivitieswherethecontributiontoGHGreductionscannotbeattributedthesereductionsthemselves,and

3)NewmitigationprojecttypeswheretheabsenceofanapprovedGHGreductionmethodologyduetodataconstraintsrequireIFCtorelyonexternalandindependentlyverifiableresearchtoensuremitigationbenefits.

ExamplesofSpecialClimateprojectsare:• NewandRenewableEnergy(NRE)specificenergystorage• TransmissionlinesconnectingNREtonationalgrids• Aluminumpasteasaninputintosolarpanels• Windturbineblades• Trade and short-term financing specific to climate-related activities through financial

intermediaries• DifferentkindsofadvisoryservicesthatenableGHGreductions.

AsofJanuary1,2012,thefollowinglistofIFCPerformanceStandardsonEnvironmentalandSocialSustainabilitywereapplicable:30

Standard Coverage1 Assessment and Management of Social and Environmental Risks and Impacts

2 Labor and Working Conditions

3 Resource Efficiency and Pollution Prevention

4 Community Health, Safety and Security

5 Land Acquisition and Involuntary Resettlement

6 Biodiversity Conservation and Sustainable Management of Living Natural Resources

7 Indigenous Peoples

8 Cultural Heritage

Figure 6: IFC Performance Standards

2.2.TheGlobalAllianceforBankingonValues31

The Global Alliance for Banking on Values (GABV) principles of Sustainable Finance andSustainableBankingareintendedtodescribefundamentalpillarsofsustainablebanking:32

Summarizingthemodelaboveitfeatures1.ATripleBottomLineapproachattheheart

ofthebusinessmodel(people,planetandprosperity),

2.Referenceandcommitmenttocommunities,servingtherealeconomyandenablingnewbusinessmodelstomeettheneedsofboth,

3.Long-term relationships with clients anda direct understanding of their economicactivitiesandtherisksinvolved,

4.Long-term, self-sustaining, and resilient tooutsidedisruptions,and

5.Transparentandinclusivegovernance.

Figure 7: GABV Principles

TripleBottom

Line

ClientCentred

Long Term

ResliliencyTransparent

RealEconomy

Culture

30 The IFC has developed a set of Guidance Notes to accompany each Performance Standard. While not formally adopting the Guidance Notes, EPFIs or borrowers may use the Guidance Notes as useful points of reference when seeking further guidance on or interpretation of the Performance Standards. The IFC Performance Standards, Guidance Notes and Industry Sector EHS Guidelines can be found at http://www.ifc.org/ifcext/policyreview.nsf/Content/2012-Edition.

31 www.gabv.org, accessed on 12 September 2014.

32 ‘Global Alliance for Banking on Values Real Banking for the Real Economy: Comparing Sustainable Bank Performance with the Largest Banks in the World October 2013’, http://www.gabv.org/wp-content/uploads/New-13-5923_GABV_report_Washington_07mvd1.pdf, accessed on 1 August 2014.

21

Alloftheseprinciplesaresupposedbeingembeddedinthecultureoftheparticipatingbank(6).Thesixprinciplesarebrieflydescribedinthefollowingparagraphs:33

Principle1:TriplebottomlineapproachattheheartofthebusinessmodelSustainablebanks integratethisapproachbyfocusingsimultaneouslyonpeople,planetandprosperity.Productsandservicesaredesignedanddeveloped tomeet theneedsofpeopleand safeguard the environment; generating reasonable profit is recognized as an essentialrequirementofsustainablebankingbutisnotastand-aloneobjective.Importantly,sustainablebanksembracean intentionalapproach to triple-bottom-linebusiness– theydon’t justavoiddoingharm,theyactivelyusefinanceto‘dogood’.

Principle2:Groundedincommunities,servingtherealeconomyandenablingnewbusinessmodelstomeettheneedsofbothSustainablebanksservethecommunitiesinwhichtheywork.Theymeetthefinancialneedsof these geographic and sector-based communities by financing sustainable enterprise inproductiveeconomies.

Principle3:Long-term relationships with clients and a direct understanding of their economicactivitiesandtherisksinvolvedSustainablebanksestablishstrongrelationshipswiththeirclientsandaredirectlyinvolvedinunderstanding and analyzing their economic activities and assisting them to becomemoresustainablethemselves.Properriskanalysisisusedatproductoriginationsothatindirectriskmanagementtoolsareneitheradoptedasasubstituteforfundamentalanalysisnortradedfortheirownsake.

Principle4:Long-term,self-sustaining,andresilienttooutsidedisruptionsSustainablebanksadoptalong-termperspectivetomakesuretheycanmaintaintheiroperationsandberesilientinthefaceofexternaldisruptions.Atthesametimetheyrecognizethatnobank,oritsclients,isentirelyimmunetosuchdisruptions.

Principle5:TransparentandinclusivegovernanceSustainablebanksmaintainahighdegreeof transparencyand inclusiveness ingovernanceandreporting.Inthiscontext,inclusivenessmeansanactiverelationshipwithabank’sextendedstakeholdercommunity,andnotonlyitsshareholdersormanagement.

Principle6:AlloftheseprinciplesembeddedinthecultureofthebankSustainablebanksseektoembedtheseprinciplesinthecultureoftheirinstitutionssothattheyareroutinelyusedindecision-makingatalllevels.Recognizingthattheprocessofembeddingthese values requires deliberate effort, these banks develop human resources policies thatreflecttheirvalues-basedapproach(includinginnovativeincentiveandevaluationsystemsforstaff),anddevelopstakeholder-orientedpracticestoencouragesustainablebusinessmodels.Thesebanksalsohavespecificreportingframeworkstodemonstratetheirfinancialandnon-financialimpact.

33 http://www.gabv.org/about-us/our-principles, accessed on 11 September 2014.

22

2.3.InternationalDevelopmentFinanceClub

The InternationalDevelopment FinanceClub (IDFC)was formed in 2011.34 It is a group oftwenty national, bilateral, and regional development banks that share a similar vision ofdevelopmentfinanceandglobalclimatechangechallengesfacingtheinternationalcommunity.IDFCmembersaredistributedacrossEurope,Asia,CentralandSouthAmerica,andAfrica.35ThekeyobjectiveoftheIDFCgreenfinancemappingexerciseistotransparentlycollateanddisclosecompletedataonnewgreenfinancecommitmentseveryyear.Bybuildingonpreviousyears’mappingexercises, IDFCworks to improve its trackingmethodology,moving towardsfurtheralignmentofapproachesamongstitsmembersinordertogeneratecomparabledata.Harmonizing the trackingmethodology, where possible, with other initiatives has also beenconsideredwithinthismappingexercise.

Byreporting theiryear-on-year increase innewgreenfinancecommitments, IDFCmemberscontinuetodemonstratetheirabilitytochannellargevolumesoffinancetowardsclimatechangemitigationandadaptation,anddevelopmentprojects.

As there is no internationally-agreed definition for green and climate finance, IDFC hasdevelopedthefollowingmodelandterminology:36

Green Finance is split into three separatecategories/themes.•Cleanenergyandmitigationofgreenhousegasemissions

•Adaptationtoclimatechangeimpacts• ‘Other’environmentalobjectives.37

InterestinglyotherdimensionsofSustainabilityarenotmirroredbytheabovedepictedmodelofIDFC,whileitisimplicitlypartoftheIDFCDefinitionofGreenFinance:

GreenFinanceisabroadtermthatcanrefertofinancialinvestmentsflowingintosustainabledevelopmentprojectsandinitiatives,environmentalproducts,andpoliciesthatencouragethedevelopmentofamoresustainableeconomy.GreenFinanceincludesclimatefinance,butisnotlimitedtoit.Italsoreferstoawiderrangeof‘other’environmentalobjectives;forexampleindustrialpollutioncontrol,watersanitation,andbiodiversityprotection.AlsotheIDFCDefinitiononMitigationandAdaptationFinanceincorporatessocialobligationsarisingfromclimatechangemitigationactivities:

MitigationandAdaptationFinanceisspecificallyrelatedtoclimatechange-relatedactivities:miti-gation financial flows refer to investments in projects and programs that contribute toreducingoravoidinggreenhousegasemissions (GHGs);whereasadaptationfinancialflowsreferto investmentsthatcontributetoreducingthevulnerabilityofgoodsandpersonstotheeffectsofclimatechange.

Clean energy and mitigation of greenhouse gas

Climatefinance

Greenfinance

“Other”envirenmental

objects

Adaptation to climate change

impacts

Figure 8: IDFC Model and Terminology

34 www.idfc.org, accessed on 11 September 2014.

35 Indonesia’s Exim Bank is member of IDFC, like some twelve National Development Banks, three Bilateral Development Banks and four Regional Development Banks: http://www.idfc.org/Who-We-Are/members.aspx, accessed on 11 September 2014.

36 ‘Mapping of green finance delivered by IDFC members in 2012’, https://www.cbd.int/financial/publicsector/idfc-greenfinance-2013.pdf, accessed on 4 October 2013.

37 Ibid.

23

2.4.EquatorPrinciples

The Equator Principles (EP) are a credit-risk management framework for determining,assessingandmanagingenvironmentalandsocialriskinprojectfinancetransactions.Projectfinance isoftenusedto fundthedevelopmentandconstructionofmajor infrastructureandindustrialprojects.UntilnownoIndonesianBankhascommittedandsignedupfortheEquatorPrinciples.

TheEPsareavoluntarysetofstandardsfordetermining,assessingandmanagingsocialandenvironmental risk inprojectfinancing.ThePrinciplesareconsidered thefinancial industry’s‘goldstandard’forsustainableprojectfinance.TheEPsarebasedontheInternationalFinanceCorporation’s(IFC)performancestandardsonsocialandenvironmentalsustainability.38

Themessageisclear:

EquatorPrinciplesFinancialInstitutions(EPFIs)committonotprovidingloanstoprojectswherethe borrower will not or is unable to comply with their respective social and environmentalpoliciesandproceduresthatimplementtheEPs.39

TheadoptingEPFIsviewtheEPsasafinancialindustrybenchmarkfordevelopingindividual,internal social and environmental policies, procedures and practices. As with all internalpolicies,thesePrinciplesdonotcreateanyimmediaterightsin,orliabilityto,anyperson,publicorprivate. Institutionsareadoptingand implementingtheEPsvoluntarilyand independently,withoutrelianceonorrecoursetotheIFCortheWorldBank.40

TheEPsareusedbyabout80%oftheprojectfinancemarketworldwide.TheprincipleshelpscreensocialandenvironmentalrisksofinvestmentprojectsthatexceedUS$10million.Theyprovideaframeworkforbankstomanagesocialandenvironmentalissuesrelatedtoprojectstheyfinanceanywhereintheworldandtoallindustrysectors,includingmining,oilandgas,andforestry.

TheEPsaimatbeingreferredtointhefollowingfourfinancialproductswhensupportinganewproject:411.Project FinanceAdvisory Serviceswhere total project capital costs areUS$10million or

more.

2.ProjectFinancewithtotalprojectcapitalcostsofUS$10millionormore.

3.Project-RelatedCorporateLoans(ExportFinanceintheformofBuyerCredit)whereallfourofthefollowingcriteriaaremet:

i. ThemajorityoftheloanisrelatedtoasingleprojectoverwhichtheclienthasEffectiveOperationalControl(eitherdirectorindirect).

ii. ThetotalaggregateloanamountisatleastUS$100million.

iii.The Equator Principles Financial Institutions (EPFIs) individual commitment (beforesyndicationorselldown)isatleastUS$50million.

iv.Theloantenorisatleasttwoyears.

4.BridgeLoanswithatenoroflessthantwoyearsthatareintendedtoberefinancedbyProjectFinanceoraProject-RelatedCorporateLoanthatisanticipatedtomeettherelevantcriteriadescribedabove.

38 http://www.ifc.org/ifcext/sustainability.nsf/Content/PerformanceStandards; and on the World Bank Group’s Environmental, Health and Safety general guidelines (http://www.ifc.org/ifcext/sustainability.nsf/Content/EnvironmentalGuidelines), are intended to serve as a common baseline and framework for the implementation by each adopting institution of its own internal social and environmental policies, procedures and standards related to its project financing activities.

39 THE EQUATOR PRINCIPLES JUNE 2006: A financial industry benchmark for determining, assessing and managing social and environmental risk in projects’, http://www.equator-principles.com/resources/equator_principles_III.pdf, accessed on 4 August 2014.

40 The complete Equator Principles can be found at: http://www.equator-principles.com/documents/Equator_Principles.pdf, accessed on 4 August 2014.

41 THE EQUATOR PRINCIPLES JUNE 2006: A financial industry benchmark for determining, assessing and managing social and environmental risk in projects’, http://www.equator-principles.com/resources/equator_principles_III.pdf, accessed on 4 August 2014.

24

While theEPsare not intended to be applied retroactively, theEPFIwill apply them to theexpansion or upgrade of an existing project where changes in scale or scopemay createsignificantenvironmental andsocial risksand impacts, or significantly change thenatureordegreeofanexistingimpact.

TheEPFIscommittoputinplaceinternalpoliciesandprocessesconsistentwiththeprinciples.Ataprojectlevel,thismeansthefollowing:42

• Thebankscreensthelevelofsocialandenvironmentalrisksandassignsariskcategory.• TheborrowercompletesanEnvironmentalAssessment.• TheborrowerpreparesanActionPlanthatdescribesandprioritizestheactionsneededto

implementmitigationmeasuresorcorrectiveactions,andmonitoringmeasures.• Theborrowerdisclosesimpactsandconsultswithaffectedgroups.• TheborrowercovenantstocomplywiththeActionPlanandreportoncompliance.

2.5.Summary

Indonesia’s financial institutionsareonly very slowly (if at all) adoptingglobal standards forenvironmentalandsocialriskmanagement.TheyarealsoatanearlystageofintroducingnewSustainableFinanceproductsandservicestothemarket.

If this trend continues local bankswill lose out against international playerswhich adapt tothatsituationmuchfasterandwillenjoythebenefittobeafirstmover.Anincreasinglygloballyconnectedworldwill also put pressure rather sooner than later on its business partners tocomplywithinternationalstandardsandbestpractices.Institutionswillhaveacompetitiveedgeif theycandemonstratethattheyapplysuchstandardsandrules.Thesefirstmoverswillbepreferredbusinesspartnersinaglobalizedworld.

Forthedefinitionpresentedbythisstudythefollowingcanbeconcluded:The presented standards reflect a range of diverse objectives of key areas of ‘green’ orsustainable business operations.Threemain groups of potential green investments can beidentified: Renewable Energy (RE), Energy Efficiency (EE) and environmental pollutionpreventionprojects.

Theproposeddefinitionofthisstudyneedstomirrorthesegroupsandalsopreparethegroundfor operationalizing it through ‘bankable’ and implementable standards and tools.Only thenstrategicinvestmentsinthosetechnologiessupportingalow-carbonindustrywillbeattractiveforbothsides–lendersandborrowers.

FurtherresearchneedstobedonetodefinethoseprojectsandinvestmentsintheIndonesiancontext that trigger thesocialdimensionof ‘sustainability’.Theapproachespresented in thischapterarelessinstrumentalinthisrespect.

42 See footnote 40.

25

ThischapterprovidesanoverviewofmarketregulationsandSustainableFinanceinitiativesinotheremergingeconomiesandintwo‘developed’countries.IthighlightstheimplementationofSustainableFinancepolicies,regulations,andtherelatedcapacitybuildingfor localfinancialinstitutions.43

3.1.Bangladesh

Bangladesh has developed a national Environmental Risk Management (ERM) Policy andStrategyFramework,whichBangladeshBank,thecountry’scentralbank,mademandatoryforthefinancialsectorin2011.

ThePolicywasbeingimplementedinthreephasesbetween2011andendof2013.Phase I (2011) includeda focusonpromotinggovernanceandpolicy, incorporatingERM incoreriskmanagement,creatingaClimateRiskFund,andsupportingtraining,marketingandreportingactivities.

Phase II (2012), which currently is being implemented, includes developing sector-specificenvironmentalpolicies,GreenStrategicPlanning,settingupGreenBranches,anddeliveringprogramstoeducatebankclientsandimprovebankdisclosureandreporting.

BangladeshBankhasparticularlyemphasizedtheneedtomanageor ‘treat’ riskrather thantolerateor transferrisk.Sustainablebanking isseenasanopportunity tomovetoresource-efficientandlow-carbonindustries,includinggreenindustryandgreeneconomyingeneral.

ImplementationoftheERMPolicywillincludea‘PolicyforPreferentialTreatmentsforCompliantBanks’.BangladeshBankpublishesthenamesofthetoptenbanksthataremostcompliantinanefforttoencouragenationwidecompliance.Compliantbankswillbegivenprioritytoopennewbranchesand receive licenses.For instance,BangladeshBankwillgivepermission forestablishingasmallandmediumenterprisebranchsubjecttoinstallationofsolarpanels.

Goingforward,BangladeshBankhasidentifiedthefollowingpriorities:tobuildcapacityamongstaff; to apply Green Banking and use the ERM guideline efficiently; to develop a culturewithintheorganizationbasedonenvironmentalgovernance;toreplicateglobalandlocalbestpractices; to share knowledgeand technical know-howwithpeer groups; to achieve furtherintegrationwithCreditRiskManagement;toapplyaquantitativeapproachforEnvironmentalRiskRating;andtodevelopadatabasefortechnicalsupport.

3.2.Brazil

TheregulatoryframeworkforSustainableBankinginBrazilischaracterizedbyacombinationof self-regulation by banks and regulations introduced by theCentral Bank of Brazil (BCB)and relevant sectoralministries. Since 2004, four Brazilian banks have signed the EquatorPrinciples: ItaúUnibanco(2004),BancoBradescoS.A.(2006),BancodoBrasilS.A.(2006),andCAIXAEconomicaFederal(2009).

Inthemid-1990s,thefirstGreenProtocolwaslaunched.Throughthisframework,publicbankscommittedthemselvesnottofinanceenvironmentallydegradingundertakingsandtoprovidesupporttosustainableproductivesystems.Toachievethis,thebanksadaptedtheirproceduresforanalysisandconcessionofcredit.In2009,Brazil’sbankingassociation(Febraban)andthe

3. Sustainable Finance Activities in Other Countries

43 This Chapter thankfully refers to a previous work/study/publication of the IFC which has published the following findings in their eBook:

GREENING BANKS - Highlights of 2012 International Green Credit Forum IFC’, http://documents.worldbank.org/curated/en/2012/01/17796118/greening-banks-greening-banks-highlights-2012-international-green-credit-forum, accessed on 5 August 2014.

26

MinistryforEnvironmentintroducedthesecondGreenProtocol,whichestablishessustainabilitystandards for commercial financial institutions. TheMinistry for Environment and BCB alsoestablishedatechnicalcooperationagreementtomonitorsocialandenvironmentalactionsandpracticesinthefinancialsystem.

Since 2008, several regulations have been introduced, which affect financial institutionsoperatinginthedifferentnaturalbiomesofBrazil:• Resolution3.545/2008wasintroducedforruralcreditandappliestotheAmazonBiome.

Itrequiresfinancialinstitutionstorequestfromborrowersi)adocumentationtoensurecompliancewithenvironmentallawsandregulations,andii)environmentallicensesandpermits.

• Resolution 3.813/2009 aims to avoid deforestation and prohibits the production ofsugarcane crops to produce ethanol and other biofuels in new areas. This resolutionapplies in thePantanalandAmazonbiomesandUpperParaguayRiverBasin,amongotherareas.

• Resolution3.876/2010prohibitstheconcessionofruralcredittopeopleorcompaniesthatmaintainworkersinslaveryconditionsaccordingtoalistpublishedbytheMinistryofLabor.Theresolutionappliestothewholecountry.

• Resolution3.896/2010establishesaprogramtoreduceemissionsofgreenhousegasesinagriculture,andissupportedbyresourcesfromtheNationalBankofEconomicandSocialDevelopment.

In 2011, the BCB introduced a regulation establishing procedures for the internal capitaladequacyassessmentprocess.Circular3.547ICAAPappliestofinancialinstitutionswithtotalassetsgreaterthan100billionReais.Banksalsoneedtoexplainhowtheyconsiderthesocialandenvironmentaldamagesintheirbusinessactivitieswhentheyevaluateandcalculatetheirrequiredcapital.

Goingforward,Brazilaimstoestablishminimumstandardsofsustainabilitythroughproposedrules or guidelines and apply them to all financial institutions. The main challenges areto determine i) towhat extent should social and environmental issues be incorporated intofinancialinstitutions’policiesandstrategies,riskmanagementanddailyoperations;andii)theappropriatecombinationofrulesandguidelines.

3.3.China

InJuly2007,theChinaBankingRegulatoryCommission(CBRC),theMinistryofEnvironmentalProtectionandthePeople’sBankofChinajointlylaunchedtheGreenCreditPolicy.Thishigh-levelpolicydeclarationdemonstratespoliticalwilltoencourageChinesebankstoreducelendingtoenterpriseswithhighlevelsofpollutionandenergyconsumptionandtoincreaselendingtothosethatpromoteenergyefficiencyandemissionsreduction.

InDecember2007,CBRCintroducedtheCreditGuidanceonEnergyEfficiencyandEmissionReductionLending.ThisguidancenotewasCBRC’simmediatefollow-uptotheGreenCreditPolicytotranslatehigh-levelpoliticalwillintobank-levelimplementation.

27

InFebruary2012,CBRCintroducedtheGreenCreditGuidelines,outliningthethreepillarsforbanks’implementation:(i)environmentalandsocialriskmanagement,(ii)identifyingrelatedbusinessopportunities,and(iii)managingbanks’ownfootprints.

Goingforward,CBRCplanstodeveloparobustmonitoringandevaluationsystemtoimproveclarityandconsistencyinpolicyimplementation.Specifically,asetofkeyperformanceindicatorswillbedevelopedandlaunched.Sector-specifictechnicalguidelinesarealsorequiredtoassistbanksinunderstandingE&Srisks,particularlyforhigh-risksectors.

3.4.Korea

KoreahasintroducedaFrameworkActonLowCarbonGreenGrowthandaFive-YearPlanto implement the nation’s green growth strategy.Thesemeasures allow the government toregulatethemarketwithtaxes,penaltiesandincentives,andencouragebankstoprovidelow-cost loans tocompanieswithgreenprojects.Theyalsocovergreenfinanceandpromoteacarbon-tradingsystemandinfrastructureforgreenfinance.

Going forward, public funds will be allocated to start-ups and SMEs, and private fundswillbetargetedtowards largercompanies.Koreaalsoaimsto increasethesizeofgreenloansbypolicybanks;toeasethelistingcriteriaofitsstockexchange,KOSDAQ,forgreencompanies; to facilitate the issuance of green primary collateralized bond obligations(P-CBOs), thereby helping to financeSMEs; and to improve the educational program totrainexperts.

Achallengecitedisthatsomefinancialinstitutionsarehesitanttofinancegreenprojects.Itisalsodifficulttoevaluategreentechnologyandproducts.

3.5.Nigeria

The Central Bank and CEOs of all major financial institutions signed a joint commitmentstatement.TwoNigerianbankshaveadoptedtheEquatorPrinciples:AccessBankPLC(2009)andAteriosCapital(2012).

Subsequent to theForum, theNigerianBankersCommittee,withsupport from theCentralBank,introducedthevoluntaryNigeriaSustainableBankingPrinciplesinJuly2012,togetherwith Guidance Notes. Sector-specific guidelines have also been developed for three keysectors: oil andgas, renewableenergy, andagriculture.Theprinciplesapply toall banks,discount houses and development finance institutions. The Central Bank has pledged toprovidenecessaryincentivestoinstitutionstakingconcretemeasurestoembedtheprovisionsoftheseprinciplesandguidelinesintotheiroperational,enterpriseriskmanagementandothergovernanceframeworks.Reportingrequirementswithguidelineswillalsobemadeavailabletotheindustry.

Goingforward,NigeriaaimstodeveloplastinglocalcapacitytomanageemergingE&Srisksand opportunities within banks’ internal operations, as well as in relevant financial-sectorgovernmentagencies,learninginstitutions,andserviceproviders.

28

3.6.Thailand

Thailand’smarketregulatorybody,theSecuritiesandExchangeCommission(SEC),approvedtheestablishmentof carboncredit funds inSeptember2011.TheSECalso issuedasetofguidelines for creating a carbon fund, aimedat assetmanagement companies.The carbonfundscanbeusedforinvestingincleandevelopmentmechanismprojectsandtobuycarboncreditsandcarboncreditfutures.Thefundsmustinvestatleast85%oftheirnetassetvalueingreenhousegasreductionprojectsorcarboncredits. Inaddition, investment inThailand’scarbonreductionprojectsmustmakeupatleast65%ofthenetassetvalue.Thecarbonfundschemeprovidesanadditionalfinancingvehicleforinstitutionalinvestorswhoareinterestedinsupportingthereductionofemissionsthroughcertifiedemissionreductionorvoluntaryemissionreductionprocesses.44

In2011and2012,IFCandtheThaiBankers’AssociationorganizedtwoE&SRiskManagementWorkshopsforThaibankstoraiseawarenessofsustainablebanking.ThesecondonefocusedonLaohydropowerinvestments.IFCfacilitatedCBRCandChinaIndustrialBank’sparticipationintheworkshopstoenableSouth-Southknowledgesharing.

3.7.Vietnam

InMarch 2009, State Bank of Vietnam (SBV), the Vietnam BankersAssociation and IFCjointlyorganized thecountry’s firstSustainableFinanceworkshop.Theworkshop featuredinternationalgoodpracticesinE&Sriskmanagement,includingIFC’sPerformanceStandards,theEquatorPrinciples,andSouth-SouthknowledgesharedbyChina’sCBRCandIndustrialBank.

InAugust2009,inpartnershipwiththeSBVandCBRC,IFCfacilitatedastudytourbysevenVietnamese government agencies and four Vietnamese banks toChina to exchange viewswithChinesebankingandregulatorycounterpartsandreviewexperiencesinimplementingtheGreenCreditPolicy.

InJune2012,followingamulti-ministrydialogueprocess,SBVreceivedconfirmationtodevelopE&Sriskmanagementguidelines,whichareexpectedtobelaunchedin2013.

3.8.UnitedKingdom

In2010,theUKGovernmentannouncedthatitwouldcreateaGreenInvestmentBankthatwillinvestingreeninfrastructureprojects.Currentlythemarketcannotadequatelyaccommodatetheseprojectsduetofearoftheperceivedassociatedrisks.InMarch2011,theUKGovernmentpublishedareportonseveralstructuresandmodelsfora‘GreenInvestmentBank’.ThereportnotesthattheUKGovernmentcommitted3billionpoundsin2011tofundthebankuntil2015.TheGreenInvestmentBankwillhelpaccelerateadditionalinvestmentinthe‘greeneconomy’by complementing other greenpolicies already set up by theGovernment. Investmentswillbemade invarioussectors,suchasRE, transport,wasteandwater.TheGreenInvestmentBankaimstoreachadoublebottomlineofbothachievingsignificantgreenimpactandmakingfinancialreturn.45

44 Government of Thailand (2011): ‘Securities and Exchange Commission, Request for Public Opinion Document on the Establishment and Management of Carbon Fund, Bangkok.

45 See http://www.greeninvestmentbank.com, accessed on 6 August 2014.

29

3.9.Summary

Manyprojectsrelatedto‘sustainability’inIndonesiaaredrivenbythegovernmentandNGOs.Mostofthemareoutsidetheareaoffinancing.AstheexampleshaveshownmanycountrieshavealreadystartedwithframeworksandinitiativessupportingGreenorSustainableFinanceandsettingupgoodexampleshowthatcanwork.Oftenthisrequiresajointapproachofboth,publicandprivatesector.

InIndonesia,suchaninitiativecouldbesettingupanEnergyEfficiencyRevolvingFund46whichtheGoIhasbeenconsideringforsomeyearsalready.Besidesthegovernment,theFinancialServicesIndustry’sregulator(BankIndonesiaandnowOJK)startstoplayamoreactiveroleinsupportingthese‘green’initiativesandtoshifttheindustry’sfocustowards‘sustainability’.

The industry itself remains ina largelyobservantposition.Oneof thevery fewexamples ismentionedinChapter4.6.Thedifferententrepreneurialriskaspectsdominatethediscussionand action – not the search for opportunities. The Financial Services Industry can supportGovernmentinitiativesbyofferingproductsandserviceswhichcomplementtheseundertakings.Beyondthattherealwaysisroomforbeingthefrontrunneratleastwithinapeergroup-ifnot‘pressuring’clientsandpartnerstocomplywithsustainabilityprinciples.Examplesfromothercountriescanhelptoidentifysuccessfulstrategies.

Forthedefinitionpresentedbythisstudythefollowingcanbeconcluded:Thesuggesteddefinition should linkeffortsof theFinancialServices Industry specifically toIndonesia’s general development principles: ‘Pro Growth’, ‘Pro Jobs’, ‘Pro Poor’ and ‘ProEnvironment’inordertounderlineandsupportthem.Ontheotherside,businessactorsshouldnotbeobligedtofollowapurelypoliticalrationale.Examplesfromother(emerging)countriesshowhowpublicandprivatesphereinteractindevelopingaregulatoryframeworkthatmeetspolitical,socialandenvironmentalinterestsviceversa–withoutjeopardizingeconomicinterests.AdedicatedsectoralapproachseemstobeinstrumentalforleveragingSustainableFinance.

46 This is a working title, subject to a possible renaming.

30

4.1.Introduction

Oneof themaindriversofanyeconomicdevelopment is thebankingsectorand itssupporttotherealsector.Withsufficient liquiditytosupportgrowthandahealthybankingindustry–onewhichearns the trustof thepopulationand itssaversaswellas thedomesticbusinesscommunity–animportantrequirementofgrowthismet.

AftertheAsianFinancialCrisisIndonesianBankshavebeenveryriskaverseandconservative,andlendingtowardsaGreenEconomyisstillinitsinfantstage.Bymanyactorsoftheindustryit isperceivedasbeingmore risky than ‘traditional’ investments. Investments inRenewableEnergyorEnergyEfficiencyarestillnotverymuchsupported,regardlessofthefactthattheseareaspromisestronggrowthanddemandforfinancing.

Indonesianfinanceinstitutionshavealsomoreandmoretolookintothesocialandenvironmentalimpactsoftheirengagements.Internalriskmonitoringandriskassessmenttoolsneedtobeputinplaceoradjustedaccordingly.

BesidesmountingdomesticpoliticalpressuretostrengthenthesustainabilityperformanceoftheFinancialServicesIndustrymarketsaredemandingfor‘cleaner’,environmentallyandsociallymoresustainablebusinessoperations.The industryasawholewill notbeable to continueignoringthisnewparadigm.Indeed,firstmoversaremakingprogress.

OJK has since a while the topic ‘Green Finance/Sustainable Finance’ on its agenda (seeChapter4.2.)andismovingforwardtoestablishinga‘roadmap’howtoinserttheSustainableFinancetopicintotheFinancialServicesIndustry.Thisinitiativeisratherreactivelysupportedbytheprivatesector:aFocusGroupDiscussion47revealedthatindustryishardlydrivenbyfirstmovers(seeChapter4.6.)butmoststakeholdersareawaitinganationalregulationinordertocreatealevelplayingfield.

4.2.PurposeoftheOJKDefinitionofSustainableFinance

AtanearlieroccasionBankIndonesiahasprovidedthefollowingadinterimdefinitionofGreenFinance:

“Green Financing is the provision of credit/financing by banks to businesses that havemettherequirements/environmentalregulationsand/ortosupportenvironmentalprotectionprograms.”48

Obviouslythisdefinitionfollowsapurely legalisticapproachwhich lacksthenormativeorevenpoliticallyformativespiritofotherdefinitions.49ThepresentstudyreflectsthedesireofOJKtowidenthefocustowardsSustainableFinance,50butalsotoincreasethelevelofambition.

OJKformulatesthemainpurposeofintroducingadefinitionofSustainableFinanceforIndonesiaasfollows:• TomaketheIndonesianbanksawarethatSustainableFinancecanbeaninterestingbusiness

opportunityfortheIndonesianbankingsector,andtopinpointtherisksofnon-engagement(opportunitycosts);

4. Sustainable Finance in the Indonesian Banking Context

47 The Focus Group Discussion took place in August 2014 and aimed amongst others at socializing this study. A follow-up questionnaire sent to the participating institutions featured the question “Are more regulations towards Sustainable Finance required to create a level playing field, i.e. all actors are obliged to follow?” All answers have been positive.

48 Bank Indonesia (undated presentation): ‘Access to financing of Energy Efficiency Market in Indonesia: Bank’s regulator point of view’, Jakarta.

49 Compare Chapter 1.

50 The new suggested definition will be presented in Chapter 5, together with a set of recommendations.

31

• ToshowthevariousareasofSustainableFinancewhichgobeyondofjustfinancingrenewableenergyandenergyefficiencyprojects;

• TosupporttheGoIinachievingitsGHGreductiontargetsbyfinancingprojectswhichhelpto reduceGHGemissionsand support the change towards thedesirednewenergymix,breakingupthedependenceonfossilfuels;and

• TogivestrategicandoperationalguidancetobanksandencouragethemtoapplyinternationalstandardsrelatedtoSustainableFinance.

4.3.Indonesia’sshifttoaGreenEconomyParadigm

Aspresentedinpreviouschaptersalotofefforthasinternationallyalreadygoneintodefining‘green’indifferenteconomiccontextsandagainstdifferentpoliticalbackgrounds.Theindividualanswersanddefinitionsprovidedarenotperfectlyhomogenous,andchanges,updatesaswellasshiftsarelikelytohappenalsoinfuture.

TheGoItargetsshifting(orelevating)thebottomlineinthedevelopmentoftheeconomy:

Fromtheoldparadigm(‘Greedy’Economy),• ahigheconomicgrowthsacrificingnatural

resourcesandsocialresponsibility,aswellas

• aheavydebteconomy-publicandprivate,

to a new paradigm (Green Economy) whichcombines• thebalanceof‘3P’(People–Profit-Planet)

with• economicparticipation(profit/losssharing).51

In thiscontext it isworthwhileremembering theoutgoingMidterm Development Plan (RencanaPembangunan Jangka Menengah Nasional,RPJM)oftheGoI:52

RPJMN 2010 - 2014

Mai

nstr

eam

ing:

Sus

tain

able

dev

elop

men

t cr

oss

sect

oral

pro

gram

: Cl

imat

e Ch

ange

National priority:Four-track strategy

1. Pro-growth2. Pro-job3. Pro-poor4. Pro-environment

1. Bureaucratic reform and governance 7. Investment and business climate

2. Education 8. Energy

3. Health 9. Environment and disaster management

4. Poverty alleviation 10. Disadvantaged, border and post conflict areas

5. Food security11. Culture, creativity and technology innovation

6. Infrastructure

Long-term Development Plan 2005 – 2025Mission: ‘Indonesia Asli dan Lestari’ (Sustainable and Veritable Indonesia)

RPJM 2005 – 2009 RPJM 2010 – 2014 (current) RPJM 2015 – 2019 RPJM 2020 - 2024

Equitable

ViableProfit Planet

People

Bearable

51 Bank Indonesia (undated presentation)” ‘Green Banking Enhancing Banking Role to Support Sustainable Development’, Jakarta.

52 Presentation BAPPENAS, 2010.

32

Thenationalcommitmenttosustainabledevelopment,underliningagaintheneedtocontributetotheglobalfightforclimatechangemitigation,isofparamountimportance.Manyofthetopics,technologiesandsolutionspresentedinthisstudyfitperfectlywellintotheframeworkforthe(past)economicdevelopmentplan.ItisexpectedthatthenewGovernmentwillnotdevelopacompletelydivergingsetofparametersandobjectives,atleastthedraftRPJM2015-2019doesnotindicateotherwise.

4.4.SystematicApproachforQualifying‘Sustainable’Lending

InordertogiveaninitialsimpleguidancetotheFinancialServicesIndustryhowtocheckifaclientandaprojectis‘sustainable’thefollowingtwoprinciplesmighthelp:

1.Theclient/borroweritselfcomplieswithallrequiredregulatoryandenvironmentalstandards.Therationalesupportingtheconceptisthatevenifaprojectisconsideredbeing‘green’itautomaticallydisqualifiesitselffrombeingclassifiedasSustainableFinanceiftheorganizationitselfdoesnotcomplywithexisting regulationsordoesnotmeetgeneral company rules.Indicatorsaree.g.aPROPERratingofredorblack(whichisbelowtherequiredminimumstandardofblue).53

2.Theproject/investment/underlyingbusinessitselfwillbescrutinizedifitcanbeclassifiedasbeingsustainable.54

Thesetwoprinciplesareillustratedinthefollowingchart:55

Theadvantagesoftheaboveoutlinedapproachareobvious:• Itreferstoexistingregulations,especiallytherelativelywell-establishedstandardsAMDALand

PROPER.Bydoingsoitstrengthenstheacceptanceoftheseinstruments.Italsoencouragescompaniestoapplyforthesestandards,ifnotrequiredalready,hencecontributingtoshapingtheenvironmentalperformanceofasmanyIndonesiancompaniesaspossible.

• Corporateswhichdonot have to or donot optmeet thePROPER requirements are notexcludedfromapplyingforSustainableFinance.56

• Itprovidesaclearandtransparenttoolforbankers,especiallyloanofficersandthecreditriskdepartments.57

• Itfeaturesa‘positivelist’ofthoseprojectswhichqualifyforSustainableFinanceinstruments.

• Through the differentiation between project and company it prevents ‘greenwashing’ ofcompanieswithadisputableenvironmentaltrackrecord.

Loan Application

CorporateCompliance: Mandatory Regulatory Standard

NOT classified as Sustainable Finance Sustainable Finance Application

CorporateCompliance:

Voluntary Regulatory

Standard PROPER (min. ‘blue’)

Sustainable Finance Project Classification

53 See Annex IV of this study.

54 See Annex VI and VII of this study.

55 Source: own; see also Annex VI.V.

56 See Chapter IV.II.

57 See Chapter 5.3.

Yes

No No No

Yes

Yes

33

WhilereferringtosomemoredetailedlistsandexplanationsintheAnnexesVIandVIIofthisstudy the following chartmayhighlight somepotential sectorswhichqualify forSustainableFinanceProjectClassification:58

Itneedstobereiteratedthatfurtherresearchis recommended to add a social dimensionto the above outlined approach which stillstrongly concentrates on the ‘green’ aspectsofSustainableFinance.

4.5. Examples of Sustainability in theBankingIndustry

Four banks are briefly presented in thissection(threedomestic,oneabroad),withtwoof them implementing Sustainable Finance/Sustainable Banking: Indonesia’s BNI andBank Asia, Bangladesh. For two otherdomesticbanks,BankMandiriandaRegionalBank‘sustainability’isnotyetinthecenteroftheirmissionorevenactivities.

Thetwonational Indonesianbanks,beingprimarilyownedbytheGoI,areconsideredbeingimportantlenderstothedomesticcorporatesector.TheassessmentoftheRegionalBankwaspartoftheresearchmandateofDIEwhichconducteda‘GreenFinanceMission’toIndonesiarecently.IthighlightssomeofthecapacitychallengesabankfaceswhenintroducingSustainable/GreenFinanceasnewbusinessmodel.

1)BankNegaraIndonesia(BNI)

Largelystate-ownedBankNegaraIndonesia(BNI)centralizesitsactivities(BNIGoGreen)aspartoftheirCorporateSocialResponsibility(CSR)program.Itisafirststepbutisfarfromwhatisrecommendedanddonebyotherbanksinothercountries.ItisorganizationallypositionedintheCorporateSecretaryDepartment.

BNI engages in well-planned, focused and sustained Corporate Social Responsibilityactivitiestocreatelong-termbenefitsforthewelfareofsociety.TheCSRprogramsatBNIarespecificallydirectedinsupportofeconomicgrowth,jobscreation,povertyeradication,andpreservationofnaturalenvironment.BNIbelievesthattheimplementationofeffectiveCSRprogramstowardstheachievementofthoseobjectiveswilleventuallycontributestotheattainmentofitsvisionstatementof‘tobeabankthatexcelsindeliveringservicesandperformance’.

Further,CSRactivitiesconductedbyBNI,includingthePartnershipProgramandCommunityDevelopment(PKBL)thatismandatoryforaState-OwnedEnterprise(SOE),representapartofthebank’sintegratedandconsistenteffortsinensuringthesustainabilityofitsexistenceasabusinessentity.59

SustainableFinanceProjects

RenewableEnergy

EnergyEfficiency

EnvironmentalPollution

Prevention

Investment toAchieve

EnvironmentalCertification

FinancialServices to

UnderservedGroups Climate

Finance

...

BiodiversityConservation

58 The dotted circle indicates that this diagram does not pretend being an exclusive list of sectors. Time will show which other technologies, business models and approaches are perceived being Sustainable Finance.

59 BNI sustainability report, http://www.bni.co.id/en-us/investorrelations/financialperformance/sustainabilityreport.aspx, accessed on 14 August 2014.

34

BNI’sPresidentDirectorstatedinthe2013Sustainabilityreport:

“Weencourageourclientstoapplysustainabilityprinciplesandwearekeentofinancegreenprojectssuchasrefineriesforbiodiesel.Wesee,especiallyamongtheyoungergeneration,agrowinginterestinsustainability.During2013,weselectedeightsectorsforloandiversification,namely manufacturing, trading, restaurants and hotels, agriculture, business services,construction,transportationandcommunication,socialservices,andmining,electricity,gasandwater.Inthesesectors,BNIcanplayanimportantrolebyincreasingandmanagingloanstopromotesustainabilitytoourclients.SustainableagricultureandrenewableenergypowerplantsarealsopotentialsectorsbecausetheycreatejobstoIndonesianworkersandtheyareprofitable.ThisillustratesourProfit,PeopleandPlanetapproachtosustainabledevelopment.Wecontinuouslyadjust our strategybasedon sustainability by strengtheningour riskandportfolio management, expanding our loans to green projects such as renewable energypowerplantprojects,andbyincreasingthecapacitybuildingofriskofficersandrelationshipmanagers.Weneedtodothistodealwiththehigherdevelopmentrisksrelatedtorenewableenergyplants.

BNIhasmade itsresponsibility forsustainabilityapartof itscorestrategy.Wearewilling tomaketheinvestmentsandtotaketherisksthatmayberelatedtothis.Wefirmlybelievethatthisisthebestwaytoserveourcountryandtoensureourownlong-termgrowth.”60

Underthemissionof‘Enrich,EnsureandSustain’thePresidentCommissionerofBNIaddsaninternationalperspective:

“We are active in local and international organizations that focus on sustainability. BNI isoneof the foundingmembersof IndonesiaBusinessCouncil forSustainableDevelopment(IBCSD),whichisanintegralpartoftheWorldBusinessCouncilforSustainableDevelopment(WBCSD).BNIisalsooneofthefirstsignatoriestotheFinanceInitiativeoftheUnitedNationsEnvironmental Program (UNEP-FI) for Sustainable Development and BNI supports therealizationofMillenniumDevelopmentGoals(MDGs)by,amongothers,joiningtheIndonesianGlobalCompactNetwork(IGCN),whichisapartoftheUNGlobalCompact(UNGC).[…]Inourbank,weimplementsustainabilityprinciplesbyencouragingouremployeestohavea green attitude, and adopt a green life style and by improving our standard operatingprocedures with environmental and social risk assessment. Externally, we carry outcommunitydevelopmentprogramsthatarebasedoneconomic,socialandenvironmentaldevelopment. BNI also takes part in activities and programs that promote sustainabilityrunbyGovernmentandbynationalandinternationalnon-governmentalorganizations.Weencourageourclientstobemoreenvironmentallyfriendlyindoingbusinessandtodevelopgreenproducts.Wealsoextendcapacitybuildingespeciallyforouremployeesandotherrelatedstakeholders.

As intermediaries in the financing system, banks have a critical role to play in advancingsustainability.Sustainabilityisapartofourtopmanagement’scommitmentanditbringsvaluetoourstakeholders.Weapplythesustainabilityprinciplewithanenvironmentalandsocialriskanalysis in the credit decision process.We require fromour industrial customers producingwaste thatall theirpermitsbasedonenvironmental impactstudiesarevalid. In thepalmoilindustry,weencouragethelargepalmoilproducerstohavearesearchunitthatmeasurestheenvironmentalimpactoftheplantation.”61

60 Ibid.

61 Ibid.

35

2)BankAsiaLtd.,Bangladesh

Bank Asia is a publicly-listed bank inBangladesh.Itsetmilestonesbyacquiringthebusinessoperationsoftwoforeignbanksandiswidelyconsideredasbeingafrontrunnerintermsofprofitabilityandthedevelopmentofnewbusinessmodels.

Asanexamplehowa‘MissionandVision’statementcouldlooklikeandwhat‘overallsupport’couldmeanthestatementofBankAsiaBangladeshbelowisquitecompelling,notatleastwhencomparedtoBNI’sapproach:

“BankAsiaandGreenBankingWeaspire toestablishusasaprominent institution thatwilloperate to reachour long termstrategicobjective tobeagreen, triplebottom linebankwhereeverydecisionwillbe takenwithbothfinancialandenvironmentalconsiderationsinmind.Wehaveunifiedoursustainableoperationsunderoneroofbyforming“GreenBankingUnit”equippedwithpermanentemployees.OurGreenBankingPolicyGuidelinesandGreenOfficeGuidehavebeencirculatedtoallouremployeesforcreatingawarenessonGreenBankingactivities&providinginstructionsaboutconservingenergy,water,savingpaper,etc.

AsaBankweplayanintermediaryrolebetweeneconomicdevelopmentandconservationoftheenvironment.OurGreenBankingactivitiesareonmultidimensionalareaswhich includebothin-houseenvironmentmanagementandundertakingGreenFinancingtowardssupportingGreenEconomy.”62

Bangladesh’sCentralBankrecognizedtheachievementsofBankAsia,andalsothegeneralimportanceofGreenBanking:

“BangladeshBankRatingonGreenBanking:BangladeshBankhasrecognizedBankAsiaasoneofthetoptenprivatecommercialBanksfortheircontributiontoGreenBankingactivitiesacrossthecountry.As our economy moves ahead, we believe financial institutions should undertake moresustainableactivitiesasweneed tomake theoptimumutilizationof our resources.WeareworkingforwardtoextendourreachforGreenBankingInitiativesinthecomingyearandhopetomaintainourleadingposition.”63

3)BankMandiri

LikeBNIBankMandiri is aSOEwithaminornumberof sharesheldby thepublic.Thebankissupportedbyitssixsubsidiariesoperatinginshariahbanking,capitalmarket,multifinance, life insurance,general insurance,aswell asanichebank focusing in themicrolendingsegment.

AscomparisonbelowisanexcerptofthemissionstatementsofBankMandiri.Asitcanbeseensustainabilityisnotanexplicitissueatleastintheirvaluesandbehaviorstatements:

62 See http://www.bankasia-bd.com/home/green_banking, accessed on 14 August 2014.

63 Ibid.

36

“OurCoreValuesandBehaviorThemanagementofBankMandiriiscommittedtoadvancingthefollowingcorevalues:1.Trust:Toinstillconfidenceamongstakeholdersthroughopenandsincererelationships.2.Integrity:Tothink,speakandacttruthfully,withdignityandupholdingaprofessionalcodeof

ethics.3.Professionalism: Committed to completing work accurately, based on a high level of

competenceandwithafullsenseofresponsibility.4.Customer focus: To position customers as primary partners in mutually beneficial

relationshipsthatsustainsgrowth.5.Excellence:Todevelopandimproveinallareastoachieveoptimumvalueaddedandbest

results.”64

4)RegionalBankinIndonesia65

TheRegionalBank is ownedby theProvincialGovernmentas the largest shareholderwith53.41%ownership,andbytheDistrictGovernments(46.59%).Thebankhasover25branchesandcatersmostlytocivilservantsbuthasdevelopedanSMEbase,giventheindustrialnatureoftheregion.

Thebankplanstorestructureinordertobecomemorespecialized.FinancingEEprojectsisseenasapossiblepartofthefuturestrategy,butthebankisataveryearlystageoftheprocess.EspeciallytheAMDALreport(EnvironmentalImpactAssessment) isatthecenterof interest.Thebankwouldliketounderstandtheprocesses,whichcompaniesneedtoundertakeAMDAL,howtheygetit,andwhatsortof informationisincludedasthispotentiallycanbeinterestingforthebank’sinternalduediligenceprocess.Thebankwantstobeabletomakeaplausibilitycheck,astheywanttoavoidthatcompaniesareshutdownforenvironmentalreasonsafteraloanhasbeengranted.

During the interviews thebankalso raised thepoint that theprocessof getting theAMDALcertificationisveryexpensive,i.e.noteverySMEcouldaffordpayingforthelicensingprices.Havingsaidthis,thebankmayoptatsomepointintimetoestablishatechnicaldepartment.IfthatisthecasethetechnicalexpertisetoguidesomeoftheAMDALorotherenvironmentalprocesses as part of the overall services of the bank to the client can be considered. Theconceptofenergyauditorswasnotyetknowntothestaffofthebank.

Thebankwouldbeinterestedtoreceivetrainingontheprocessandcontentoftheenvironmentalpermits,thegeneralunderstandingofGreenFinanceandwhatthebankneedstodotoassess‘green’loanssuchasinvestmentsintorenewableenergyandenergyefficiency.Theideaofachecklist,howtointegrategreenfinanceintotheirprocesseswasmentioned.Alsotheywouldliketoimprovetheirtechnicalunderstandingofwhatliesbehindenergysavingstoreducetheloan risk for thebank.Related to this isalso theneed to invest intogatheringmoresector-specificknowledgeonfinancingtheprioritysectorsoftheregion.

4.6.Summary

SustainableFinanceishardlyontheSeniorManagements’agendainmostbanksinIndonesia.ItisalsomoreseenaspartoftheirCSR(CorporateSocialResponsibility)initiatives/activitiesorasaninstrumenttomonitorcompliancewithexistingregulationsthanasbusinessopportunityandbusinessmodel.

64 See http://www.bankmandiri.co.id/corporate01/pdf/058483018754.pdf, accessed on 14 August 2014.

65 Excerpts from the findings of a GIZ mission on Energy Efficiency Finance, conducted jointly by GIZ and DIE, 2014.

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Internationalexperiencesshowthatearlymoverscantakeadvantageofsuchalackofgeneralstrategicpositioning,hencetheypossiblycanchallengeestablishedplayerswhichdonot(yet)identifythattrend.

Financing of Renewable Energy is such an example. Only very few banks put effort intodeveloping thatsegment(e.g.buildingupexpertiseonminihydroorphotovoltaicfinancing),althoughitisalreadywell-knownamongstindustryplayers,henceofferinganopportunitytotaponattractivemarginsinthatsector.

Forthedefinitionpresentedbythisstudythefollowingcanbeconcluded:WiththeobjectivetostrategicallypromoteinvestmentsinRenewableEnergy,EnergyEfficiencyandenvironmentalpollutionpreventionprojectsthedefinitionshouldspecifyakeyresponsibilitydirectly at the top/senior management of the Financial Services Industry. Developing andimplementing a Sustainable Finance philosophy and strategy requires a holistic approachand an all-embracing understanding. The definition should demand from management toactivelypromotesuchanengagementwithintheindividualinstitutions.Forthatclearlinesofresponsibilityandreportingareneeded.

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5.1. DefinitionofSustainableFinanceforIndonesia

Referring to theequalityof the threedimensionsofsustainability, the ‘newparadigm’(3P),itissuggestedtostartwitharathergenericdefinition.Thisdefinitionshouldnotbedeviatedfromother termsor build uponother concepts asa referencepoint, i.e. it should be self-explanatory.66 It should also offer sufficient room for further specifications, always undertheconditionthateconomic(alsobusiness),societalandenvironmentalaspectsareequallycovered.67Thisdefinitioncanbecomplementedbyadditionalexplanationsorannotationsastobeseenbelow.

The following definition of Sustainable Finance is suggested as a result of this study (coredefinition,box1,andannotation,box2):

SustainableFinanceDefinitionSustainableFinanceistheoverallsupportbytheFinancialServicesIndustryforSustainableGrowth,whichisdefinedasgrowthgeneratedthroughtheharmonybetweentheeconomy,thesocietyandtheenvironment.

SustainableFinanceComprisesoftheFollowingDimensions:• Itaccomplishesindustrial,socialandeconomicadvantagesinanattempttoreducethethreat

ofglobalwarmingandtopreventotherenvironmentalandsocialproblems.

• Itaimstoachievethegoaltoshifttowardsacompetitivelow-carboneconomy.

• Itstrategicallypromotesinvestmentsinrenewableenergy,energyefficiencyandenvironmentalpollutionpreventionprojects.

• SustainableFinancesupports Indonesia’sdevelopmentprinciples,asstated in theRPJM:ProGrowth,ProJobs,ProPoorandProEnvironment.

Afollow-uptoaFocusGroupDiscussionrequestedtheparticipantstocommentontheabovementioned definition, and to cast a ballot for two alternatives. Out of a sample of 12 non-representativerepliesfiveanswerssupportedthesupernatantdefinition.Withthesamenumberofvotesthefollowing,similardefinitionsuggestedbyOJKwassupported:68

(ALTERNATIVE)SustainableFinanceDefinitionSustainable Finance is the overall support by the Financial Services Industry to supportSustainableEconomicGrowth,whichisconsideringthesocialwelfareaspect,andtheprotectionandmanagementoftheenvironment

The authors of this study are nevertheless convinced that the combination of the abovementioned,moreuniversaldefinitionwithmoreapplicableandmeaningfulexplanationsservestheIndonesiancontext inamorepurposefulmanner. Itprovidessuggestionsandguidelinesfor the implementation andexecution ofSustainableFinanceproducts and services. It alsoavoidsanymisperceptionwith regards toapossibleprioritizationof the threedimensionsofsustainability.69

Havingsaidthisthefollowingexplanationsrefertotheabovementionedcoredefinitiontogetherwiththeannotation:

5. Recommendations

66 See Chapter 1.7.

67 See Chapter 3.9.

68 The following third alternative definition was supported by two respondents: “Sustainable Finance is the overall support by the Financial Services Industry to promote investments in renewable energy, energy efficiency and environmental pollution prevention projects.”

69 See below, definition of ‘Sustainable Development’.

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Explanationsofthetermsexplicitlyorimplicitlyusedinthedefinition:• ‘Overallsupport’

AllactivitiesundertakenbytheFinancialServicesIndustry,suchas:- Public endorsement and promotion of sustainable activities, products and services to

supportagreen,lowcarboneconomy;

- Improvementofitsownenvironmentalandsocialperformance(e.g.energysavingbuildingfittingout,paperlessoffice,CSRactivitiesetc.);

- Effectiveidentification,measurement,monitoringandcontrolofenvironmentalandsocialrisksthroughariskmanagementprocess,creditpoliciesandprocessmanagement;

- Seniormanagement(BoD,BoC)shouldbeencouragedtotakeownershipofpromotingSustainableFinancewithintheirorganization;and

- Dedicated Sustainable Finance departments should be created in order to focus andcentralizeallactivitiesandbuildacenterofcompetenceforthattopicwithintheinstitution.

• ‘SustainableGrowth’ isunderstoodas“growththatitispossibletoSUSTAIN(=makecontinue)withoutcausing

economicproblems”.70

Economicgrowthoccurswhenrealoutputincreasesovertime.RealoutputismeasuredbyGrossDomesticProduct (GDP)atconstantprices,so that theeffectofpriceriseson thevalueofnationaloutputisremoved.

Sustainableeconomicgrowthmeansarateofgrowthwhichcanbemaintainedwithoutcreatingother significant economic problems, especially for future generations.There is clearly atrade-offbetweenrapideconomicgrowthtoday,andgrowthinthefuture.Rapidgrowthtodaymayexhaustresourcesandcreateenvironmentalproblemsforfuturegenerations,includingthedepletionofoilandfishstocks,andglobalwarming.

Periodsofgrowthareoftentriggeredbyincreasesinaggregatedemand,suchasariseinconsumerspending,butsustainedgrowthmustinvolveanincreaseinoutput.Ifoutputdoesnotincrease,anyextrademandwillpushupthepricelevel.71

• ‘SustainableDevelopment’ With‘development’being“theactorprocessofdeveloping;growth;progress”,‘Sustainable

Development’isconsideredbeingsuchadevelopment“thatmeetstheneedsofthepresentwithoutcompromisingtheabilityoffuturegenerationstomeettheirownneeds.”72

TheOrganizationforEconomicCooperationandDevelopment(OECD)ratherseesanintrinsicconflictbetweenenvironmentalandsocialinterests:

“Governmentsfacethecomplexchallengeoffindingtherightbalancebetweenthecompetingdemandsonnaturalandsocialresources,withoutsacrificingeconomicsprogress.”73

70 According to ‘Longman Business English Dictionary’, http://www.ldoceonline.com, accessed on 16 August 2014.

71 http://www.economicsonline.co.uk/Managing_the_economy/Sustainable_growth.html, accessed on 16 August 2014.

72 http://books.google.de/books?hl=de&lr=&id=IgbWAgAAQBAJ&oi=fnd&pg=PA8&dq=harmony+economy+society+environment&ots=IBv25S13Fu&sig=hFhZ2g_zHixGO0jcKDYf6AoSTFs#v=onepage&q=harmony%20economy%20society%20environment&f=false, accessed on 17 August 2014.

73 OECD: Critical Issues, as quoted in http://www.ukessays.com/essays/environmental-sciences/what-are-governments-doing-for-sustainable-development-environmental-sciences-essay.php#ixzz378mslv00, accessed on 16 August 2014.

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Thedefinitionisratherbasedonatriangularunderstanding of Sustainable Development(see below figure 13), as aiming forestablishingharmonybetweentheeconomy,the society and the environment.Accordingto this approach Sustainable Developmentcombines socially and environmentallybearable development with equitableparticipationandviablebusinessmodels:

•‘Globalwarming’Agradualincreaseintheoveralltemperatureoftheearth’satmospheregenerallyattributedtothegreenhouseeffectcausedbyincreasedlevels of carbon dioxide, CFCs, and otherpollutants.74

5.2.OperationalizetheDefinitionthroughaSustainableFinanceProjectClassification

OnlythoseprojectsthatcomplywithallexistingenvironmentalregulationsincludingAMDALandapplicablestandards(e.g.PROPERratingofatleast‘blue’)canbeconsideredforsustainablefinancing.Tooperationalizethedefinition,atwo-stepcompliancecheckisrecommended,seeChapter4.4.Furthercriteriaarerequiredespeciallyforsocialinclusivenessandtheoverallsocialdimensionofsustainability.Thestudycouldnotelaborateonthisfurther.

5.3.RecommendationsforFurtherImplementation

1)FormulateSustainableCreditGuidelines

SustainableCreditGuidelinesshouldbe formulated for thepurposeofencouragingbankinginstitutionstofocusonSustainableFinance,activelyadjustcreditstructures,effectivelyfendoffenvironmentalandsocialrisks,betterservetherealeconomyandboostthetransformationtogreengrowth.

Keyfeatures:• BankingInstitutionshavetobeencouragedtopromotegreencreditstrategicallytosupporta

green,lowcarboneconomy;

• Improvementoftheir(banksandotherfinancialservicesproviders)ownenvironmentalandsocialperformance;

• Effectiveidentification,measurement,monitoringandcontrolofenvironmentalandsocialrisksiscrucialthroughariskmanagementmechanism,creditpoliciesandprocessmanagement;

• Senior management (BoD, BoC) should be encouraged to take ownership of promotinggreencreditwithintheirorganization;

• Processmanagement is core to improve credit adaption: includingactive identificationofclientsatrisk,useofspecificandcustomizedcreditgrantingguidelinestocertainindustries,improvement in the due diligence process and credit approvalmanagement, changes tocontractclausesandpost-loanmanagement;and

• Promotionofinformationdisclosureandtransparency.

Bearable

ViableEnviron-ment

Economic

Social

Equitable

Sustain-able

74 See http://www.oxforddictionaries.com/definition/english/global-warming, accessed on 17 August 2014.

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Theguidelinesshouldbydefinitionbegeneralinnatureandthereforetheywilllackspecificinstructionsorprotocols.Thebenefitisthatitallowsbankstoevolveanddevelopattheirownpaceandprovidesspaceforinnovation.Thelimitations,particularlytobanksunfamiliarwithSustainableFinance,arethattheydonotprovidesufficientclaritytobanksonhowtoproceed.

Furthermore, it is recommended thatbanks includeall aspectsofenvironmental issues intotheircredit rating system/methodology.As all banks have different internal systemsOJKshouldgiverecommendationswhereadjustmentsarenecessarywhentheyaudit thebanks.Thecreditscoringsystemandmethodologyhastoreflectallgreeneconomyaspects.

Itisrecommendedthatforcertainindustries/technologiesaspecificcreditriskchecklistwillbedevelopedbyOJKandprovidedtothebankingindustry.

2)SupporttheProcessthroughCapacityBuildingandKnowledgeSharingPlatforms75

Atthisinitialstageof‘SustainableFinance’bankerswillveryoftendependonexternalexpertstoevaluate therisksaccompanying theseprojects, its feasibilityandareliableassuranceorlevelofcomfortthattheprojectwilla)deliverthedesiredresults(e.g.reducedenergycosts),andb)staywithintheinitialbudget(e.g.forgreenfieldinvestmentsintorenewableenergypowerplants).SectorialguidelinesprovidedbyOJKgoingforwardcouldbeuseful.

Relativelysoon, theseprocessesneed to internalized.Notonlyhas the industry itselfcalledfor additional socialization, education and training efforts. It also claims lack of (internal)management resources, training, experiences and general know how.Not at least asmostbanksdonot(yet)operatespecificbusinessunitsforSustainableFinance.

The following chart shows the departments and its possible involvement in developing andimplementingSustainableFinance:76

Credit risk analysis departmentAnalyzes E&S risks of project/client; analyzes E&S benefits of projects

Colleteral departmentEvaluates potential problems with collateral property

Legal department and security departmentReviews legal procedures and comments on E&S safety and compliance

Banking methodology departmentDevelops and revises sustainability policies

Marketing and customer base expansion departmenAssesses sustainability opportunities, markets additional products/services to clients

Advisors and councilors to senior managementAnalyzes E&S opportunities

Integration of social and environmental sustainability int bank aval’s credit analysis and approval process

Project and finance unitinteraction and negotiation with clients Clients

Figure 14: Bank Departments and their Involvement

75 These recommendations are, wherever mentioned, supported by the different feedbacks which were received during the Focus Group Discussions organized by OJK in mid-2014. En route, additional needs, structural shortcomings and training requirements might be identified. Hence this list should not be considered being exclusive.

76 Source: own.

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Capacitybuildingdoesnotonlymeantraining-operatorsandpractitionersdoalsolearnfromexperiences:afterhavingfinancedanumberofprojectsotherinstrumentshavetobeintroducednext to internal capacity building as this process is time-consuming and very costly for theindustry.

Alternative structuresand ideashavealsobe included in the capacity buildingmix in ordertospeedup the lendingprocessand tominimize the risks forbankswhichventure into thisnewbusiness area.Suchalternatives could be somedayswithmanufacturers, developers,appraisers,consultantsaccompaniedbyfieldtripstoexistingsimilarprojects.Itcouldalsobeanideatosetupaninter-bankworkinggroupbyOJKwhereinformationandexperiencesareshared.

Possiblyagreaterandmoreactiveengagementofthedifferentsectoralassociationscouldcomplement thesemorepublic activities.This shouldnot only be theorganizationsof thefinancial services industry (e.g. insurance and bankers association), but also the industrysector associations, for instance representing the textile industry or the power generationindustry.

3.InvolvetheInsuranceIndustry

BankscallamongstothersforspecificincentivesthatmitigatetheperceivedrisksofSustainableFinance.77 Instead of developing new government instruments or guarantees a stronginvolvementof the insurancesector tomitigatesomeof the intrinsic riskscouldconsidered.Typicallybanksdonotworkverycloselywiththeinsurancesectortoshareandmitigateriskdespitethefactthathereisalotofknowledgeintheinsurancesectoralreadyinplace(mainlyby international insuranceproviders).Bankshave to tapon that knowledgepool and sharesomeoftheriskwiththem.

Typesofbondsprovidedbytheinsuranceindustrywhichbankscanincludetomitigatesomerisksinvolvedwithprojects(‘fromthecradletothegrave’)are:

• Bid/TenderBond– toprovidesecurityagainstacontractors’ inabilityorunwillingness toproceedwithanawardedcontract.

• AdvancePaymentBond–tosecurefundsthathavebeenadvancedtoacontractorforthepre-purchaseofmaterialsortheearlymobilizationofplantandequipmentunderacontract.

• PerformanceBond – toprovideprotectionagainstnon-performanceof theconditionsofcontractorsecurityagainstabandoningthecontract.

• Surety Bond – to guarantee the debts, obligations or conduct of a contractor or sellerinvolvedinaconstruction,manufacturingortradecontract.

• CustomsBond– toguaranteecompliancewithcustomsrequirementsandregulations inrespectofimports/exports.

• LicenseBond–lodgedwithregulatory/licensingauthoritiestoprovideconsumerprotectionfor theservicesof the licenseecompany (i.e. itwill providepotential reimbursement toaprejudicedconsumerintheeventofthelicensees’defaultundertheconditionsofthelicense).

77 See the results of the mentioned Focus Group Discussion.

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OutlookAsoutlinedabove,

• aspecificdefinitionforSustainableFinancefortheIndonesiancontextisnecessarybecauseinternationalstandardsdonotfullyseemtomatchthespecificrequirementsofIndonesia.

• ThedefinitionneedstobepartofabiggerpictureandservesasaninputtoOJKindevel-opingandimplementingtheSustainableFinanceRoadMap.

• Onlytogetherwithaclearregulatoryframework,sectorspecificguidelines,anincentivemechanismandsupportforbuildingupknowledgeandoperationalcapacitiesinthefinanceindustry,thisdefinitioncanstarttodevelopapositiveeffect.

• Finally,itwillhelpthefinancialindustrytopaymoreattentiontotheopportunitiesarisingfromaGreenandInclusiveGrowthProcessandtorespondtointernationalmarkettrends,strengtheningthecompetitivenessofthefinanceindustry.

4)UseESCOStructures

Thebasic idea is that the investment is fullyor partially done via professional EnergySavingCompanies (ESCOs)whoguaranteetheenergysaving.TheESCOwouldbepaidfrom the real energy cost saved through acontractor agreement. The key advantagefor the company (’borrower’) is that theESCOwilldotheinvestmentandwillonlybepaid if the cost savings are achieved (othermodelswheretheinvestment isdonebytheequipment/building owner also possible).Typically the ESCO guarantees the energysavings, and after the payback period theequipmentis‘handedover’tothecompanyinwhichtheequipmentwasinstalled.

Credit Risk

Loan Loan Repayment

Lender/Investor

Client

ESCOPerformance RiskOperation Risk

Guarantees performance throughout contract period R

emun

erat

ion

thro

ugh

savi

ngsPayment for the

Equipment and Plant

Equipment and plant transfer to client after contract period

Business Risk

Equipment

Operation and maintenance throughout contract period

78 Source: own.

Figure 15: Typical ESCO Scheme78

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I.ExistingGovernmentRegulationsandInitiatives79I.I.IntegrationofOJK’sSustainableFinanceDefinitionintootherGovernmentPrograms

Indonesia has many programs and initiatives on ‘Green Economy’, ‘Sustainability’ or othercommitments towards reducing GHG emissions. Often these activities are implementedindependently within the various ministries. Sometimes they are ‘competing’ and are notcoordinated perfectly well.80 It cannot be assumed that all programs are known, and thattransparencyandharmonizationwithin thevariousministries isgiven.OJKand itsdefinitionofSustainableFinancecanbuildhereabridgingelementasitshouldincludeallinitiativesandregulationsintoitsdefinition.Thisdefinitionwillbenotstaticbutshouldbeamendedandfine-tunedinlinewithnewregulationsandregulatorydevelopments.

AconstantdialogbetweenOJKandallministriesisthereforenecessarytosupportthevariousgovernmentinitiativeswiththeSustainableFinancedefinitionwhichwillbewidelyspreadviathebankingsectorandhencethenintotherealsector.

The definition of Sustainable Finance in Indonesia should pay special attention to the GoIprograms and support their implementation in order to achieve the national goals onGHGemissionreductions.

Thefinanceindustryshouldknowaboutthemandshouldtrytosupportspecificallytheindustriesandareaswhichhavebeenidentified.AtthesametimeotherareaswhereSustainableFinancecanleadtoGHGreductionsshouldnotbeneglected.

ANNEXES

TheGovernmentoftheRepublicofIndonesiafocusesamongstothersthefollowingareas:• EnergyEfficiencyandEnergyConservation• EnergyVision25/25whichdealswiththeEnergyMixtowardsRenewableEnergy• SavingEnergyandWater• SettingGreenIndustryStandards• EcoLabeling.

Inmanyareastheinitiativesarestillinanearlystage(e.g.forEcoLabelingorsettingofGreenIndustryStandards).Ongoingupdatesarenecessaryonwhatisinplaceandwhatisplanned.

Indonesia’s Initiatives on Low Carbon Development/ GHG Emission ReductionRANK-GRK and other initiatives

Forestry and Peatland Agriculture Energy /

transportation Industry Waste Management

• Sustainable forest Management REDD+:- Moratorium

primary forest & peatland

- Pilot province- One map- National

strategy• Reforestation• One billion trees

plant program

• Efficient water and land management

• Sustainable agriculture management

• Waste management

• Renewable energy• Energy efficiency• Geothermal• Hydropower• Biomass• Solar/wind• Promoting

efficient public transportation

• Railway & coastal transportation

• Green building• Green car

• Energy efficiency technology

• Wastewater management

• Adoption new cleaner technology

• Waste to energy• Reclamation• Green city

Figure 16: Indonesia’s Initiatives on Low Carbon Development/GHG Emission Reduction79 See also ‘APEC Peer Review on

Energy Efficiency in Indonesia, June 2012’, http://www.ewg.apec.org/documents/EWG43_12-b%20PREE%20Indonesia%20report%20_20120213.pdf, on 10 September 2014.

80 So also a repeated comment from participants of the follow-up to the OJK Focus Group Discussion in mid-2014.

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ItisrecommendedthatOJKcreatesaninformationplatforminordertosecuretransparencyandfrequentupdatesamongstallplayers.Belowsomeoftheon-goingandmostrelevantinitiativesarehighlighted.

WithregardstoEnergyEfficiencyandEnergyConservationtheGoItargetsthefollowingareas:A.IndustryB.CommercialC.TransportationD.Residential.

TheEnergyVision25/25callsnotonlyforachangeintheenergymix(seeAnnexII)butalsofora33.85%overallprimaryenergyreductionfromabusinessasusual(BAU)case,throughenergyconservationmeasures.

Energy conservationmeasuresareexpected to reduceoverall primaryenergy consumptionfrom450milliontonsoilequivalentunderaBAUcase,to380milliontonsofoilequivalentinthe energy conservation case.Until 2025 this constitutes an energy saving through energyconservationofabout18%.TheenergyconservationgoalsarefurtherelaboratedinthedraftoftheNationalEnergyConservationMasterPlan,RIKEN.

Potential and target for energy conservation81

Sector Potential of energy

conservation

Target of energy conservation

sectoral (2025)

Share of energy final consumption (2009)

TOTAL target of energy conservation

(2025)

Industry 10 – 30% 17.00% 41% 6.9%

Commercial 10 – 30% 15.00% 5% 0.7%

Transportation 15 – 35% 20.00% 37% 7.4%

Household 15 – 30% 15.00% 13% 2.0%

Others 25% 0.00% 4% 0.0%

TOTAL 100% 17.0%

Annual accumulated targets for energy conservationSector 2011 2012 2013 2014 2015 (2016-20) (2021-25)

Industry 0.01% 1.25% 2.90% 3.50% 4.00% 9.50% 17.00%

Commercial 0.00% 0.50% 2.00% 4.60% 7.40% 13.80% 15.00%

Transportation 1.50% 4.00% 6.00% 6.80% 9.30% 15.90% 20.00%

Household 1.80% 4.00% 5.60% 7.30% 9.20% 14.00% 15.00%

Figure 17: Energy Conservation

Itisestimatedthatonlyabout7%ofIndonesia’soverallnationalemissionsaregeneratedbytheindustrialsectorwithoutconsideringLandUse,LandUseChangeandForestry(seebelowoverviewprovidedbyBAPPENAS).MostofIndonesia’sGHGemissionscomefromtheforestry,peatlandandagriculturalsectorwhicharenotreallyservicedbythefinancesectorunderthesupervisionofOJK.

Industryisthemajorconsumerofenergy,accountingforabout44%ofallenergyusedinIndonesia.AccordingtotheIndonesianenergyprojectionenergyconsumptionoftheindustrialsectorin2050willincreasefivetimesasmuchasthatin2010.ThereforeEnergyEfficiency(EE)oftheindustrysectoristhemostimportantissuetoreduceenergyusage.

81 Source: Draft RIKEN – Directorate of Energy Conservation.

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EnergyEfficiencyandConservationintheTextile,CementandSteelIndustriesareidentifiedbyMinistryforEnergyandMineralResources(MEMR)asthefocusindustriesastheyplayaveryimportantrole in Indonesiaforemployment,developmentandexportsandarethe industrieswhereproportionallythemostenergyisused.82

Tophaseout thepractice that contributes togreenhousegas (GHG)emissionsandwastesvaluable energy resources, the Gol announced in 2009 theGreen Oil and Gas IndustryInitiative(GOGII)thataimsata20%reductioningasflaringintheshortterm,40%by2014andeliminationofallunnecessaryflaringonasustainablebasisby2025.

Buildingsingeneralarethemainconsumerofenergyinthecommercialsector;examplesareoffices,malls/retail,hotelsandhospitalstonamethemostprominent.InvestmentsintherewillsignificantlyimpacttheGHGemissionscomingfromthissector.

Mainenergyuserwithroughly>50%ofenergyusedincommercialbuildingsistheairconditioningsystem.Banksshouldconsidermodelshow tofinanceAC’s incommercialbuildingswithoutasking formortgages on the land and building in order to tap into that hugemodernizationpotential.

ThetransportationsectorcurrentlyisnotofgreatimportancetothebankingindustrybutthismightchangewhenthediscussiontowardsGreenCarsandFuelefficientvehiclesandtransportdevelopsfurther.ThefocusoftheMinistryofTransportationisonimplementingenergysavingprinciples in planning, operating andmanaging of national transport systems; incorporatingvehicleroadworthinesstests,anexhaustgastestingregardingcompletenessofcombustionin relation to energy efficiency. Furthermore it develops Ministerial initiatives for nationaltransportationtocreateenergyefficienttransportsystemsandenergyefficientvehicles.

RAN-GRK Emission reduction targets by 2020

Sector

Emission reduction target (giga ton C02)

Action plan Executing agency26% 15%

(total 41%)

Forestry and peatland

0.672 0.367 Land and forest fire control, water system management, land and forest rehabilitation, timber plantation (HTI), private forest (HR), illegal logging eradication, deforestation prevention, community empowerment

Min. of Forestry, Min. of Public Works, Min. of Environment

Agriculture 0.008 0.003 Introduction of low emission paddy variety, irrigation water efficiency, utilization of organic fertilizer

Min. of Agriculture, Min. of Environment

Energy and transportation

0.038 0.018 Biofuel utilization, utilization of high fuel efficiency machines, TDM im-provement, public and road safety quality improvement, demand side management, energy efficiency, renewable energy development

Min. of Transporta-tion, Min. of Energy, Min. of Public Works

Industry 0.001 0.004 Energy efficiency, renewable energy etc. Min. of Industry

Waste 0.048 0.030 Land fill/disposal site development, waste management and integrated liquid waste management in urban area

Min. of Public Works, Min. of Environment

Figure 18: RAN-GRK Emission Reduction Targets by 2020

82 Buku Profil Investasi Efisiensi Energi 2013 Penerbit : Direktorat Jenderal Energi Baru Terbarukan dan Konservasi Energi Kementerian Energi dan Sumber Daya Mineral Institute for Essential Services Reform (IESR).

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Theresidential/housing/buildingssectorisataninfantstageindeveloping• GreenHousing• EEequipmentsuchasolarheaters,Photovoltaic• GreenHouseholdappliances.

Seenfromaneutralperspectivethebankingsectorisnotyettappingonthebusinesspotentialof lending tobuildingowners. Incase thebanking industrywouldofferstandardized lendingproducts (as role model could be used the Consumer Finance Industry lending model tomotorbikebuyers)hugeenergysavingscouldbeachievedandlendingwithattractivemarginscouldbecreated.

I.II.ResponsibilitiesofRelatedMinistriesandGovernmentAgencies

The Directorate of Energy Conservation in MEMR is the lead agency for national energyconservation.Through inter-ministerialandgovernmentagencycoordination itdefined in thedraft RIKEN the role and responsibilities of thoseMinistries (13) and government agencieswhichareinvolvedinnationalenergyconservation.Therolesandresponsibilities,asstatedinthedraftRIKENveryconcisely,areasfollows:

MinistryofEnvironment(KLH):ForSustainableFinancethefollowinginitiativesbyKLHareimportant:• Eco-Labeling• PROPER(seeAnnexIV).Asalreadymentionedcompliancewiththeseregulationscangivepositiveindicationsabouttheborrowersattitudetowardsagreeneconomyandtheclassificationifprojects/lendingcanbeclassifiedasbeing‘sustainable’or‘green’finance.

The Ministry of Industry is responsible to establish guidelines to implement energyconservation in the industry sector. It developsMinisterial initiatives to increase industrialenergyefficiencyandproductcompetitiveness,andmanufacturesenergyefficientproducts.TheMinistryestablishesenergyintensitybenchmarksandenergyefficiencystandards,anditdevelopstop-runnerprogramssuchastheGreenIndustryAward.TheAwardisintendedforindustrialcompaniesthatdeemedtohavebeenabletominimizepollutionandenvironmentaldestruction. There are three categories: for Large Private companies, Small andMediumCompaniesandSOEs.

TheMinistry of Public Works is responsible to establish regulations on building energyperformance,basedon the IndonesiaNationalStandard-SNI(StandarNasional Indonesia)- regarding energy conservation in buildings. It establishes guidelines to implement energyconservation inbuildings,developsMinisterial initiativesto improveonenergyuseefficiencyinbuildings,establishesenergy intensitybenchmarksandenergyefficiencystandard,and itdevelopstop-runnerprograms.

TheMinistryofTransportation implementsenergysavingprinciples inplanning,operationandmanagementofnationaltransportsystems;incorporatesavehicleroadworthinesstesting,an exhaust gas test regarding completeness of combustion in relation to energy efficiency,anditdevelopsMinisterial initiativesfornationaltransporttocreateenergyefficienttransportsystemsandenergyefficientvehicles.

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TheMinistryofTradeestablishesregulationsandoversightofproductsinthemarketthattheyhaveinformationonenergyuseefficiency,suchasanenergylabel.ItpromotesuseofenergysavingproductsandimplementsMinisterialincentivesforbringingintothemarketproductsthatareenergyefficient.

TheMinistryofFinanceallocatesfundingforenergyconservationinthenationalgovernmentbudget for all sectors. It creates budget allocation guidelines for government and regionalgovernmentswhereenergyconservationprogramisoneof thecriteria forbudgetallocation.TheMinistryprovidesanationalbudgetforincentivestoproducersofenergysavingdevicesandforenergyuserswhoqualifyforenergysavings.

TheNationalDevelopmentPlanningAgency(BAPPENAS)incorporatesenergyconservationin the national development plan. It creates planning guidelines for national developmentprojectsatthecentralandregionallevels,whereenergyconservationisoneofitscriteria.

The Ministry of National Education integrates energy conservation knowledge into theeducationcurriculuminelementaryeducationandtoinstitutionsofhigherlearning.ItdevelopsMinisterial initiatives in national education to establish a society well-informed in energyconservation.

TheMinistryofResearchandTechnology(theAgencyforAssessmentandApplicationofTechnology,BPPT)disseminatesinformationonenergysavingtechnology.Itcoordinatesassessments about energy conservation and develops demonstration of energy savingprocesses,technologies,anddevices.

Regional Governments and Regencies/City Governments disseminate information onenergyconservationanddevelop regulationswhichobligateenergyconservation in industryand businesses. They provide incentives and awards to achievers of energy conservationandmandateenergyconservationstandardssuchasSNIregardingEnergyConservation inBuildings.

II.GovernmentCommitmentstoAchieveGHGEmissionReductionTargets

The government is committed to achieving the following target: Renewable Energy shouldcontribute25%to thenationalenergymix.TheGovernment includes in that targetbio fuels(withmorethan5%),geothermalenergy(equallymorethan5%)aswellasotherrenewableenergysourcessuchphotovoltaic,hydropower,windenergy,biomass,biogas,wastetoenergyandothers,includingnuclearpower.

AsthesearetheofficialtargetsoftheGoI,thebankingsectoranditsdefinitionofSustainableFinanceshouldbeinlinewiththispoliticalcommitment.Inthefollowingthreemajorpoliciesareshortlypresented.Equallythetextileandsteelsectorsareusedasexamplestohighlightsomeoftheongoinginitiativesanditsexpectedoutcomes.

II.I.EnergyEfficiencyPolicy

GovernmentRegulationNo.70oftheYear2009(70/2009)regardingEnergyConservationisalegallybindingregulationexplanatoryoftheEnergyLawonmattersofenergyconservation.TheregulationelucidatesmandatesoftheLawspecificallyonpolicyandobligatoryprograms.Hence,bylawEnergyConservationisanobligatorytargetofpolicy-makersandmarketplayers.

49

The regulationmandatesenergy conservation in theactivity of energy resourceproduction,resourceuse,supply,andfinalenergyuse.Anypersonorenterpriseinvolvedinenergyresourceproduction, resource use, and energy supply is obliged to implement energy conservationinstruments;tobeachievedthroughuseofenergyefficienttechnologywhichmeetsstandardbylawandregulation;energyefficientequipment,materials,process,andsystem;andendeavorinplanningtouseenergyefficienttechnology.

TheMinisterialRegulationrelatedtoGovernmentRegulationNo.70/2009definesabenchmarkforimplementingenergyconservationasexplainedindraftMinisterialRegulation:energysavingreductionofatleast1%peryear.

II.II.EnergyVision25/25

Indonesia’smostrecentpolicyonenergyandenergyconservationgoaliscalledEnergyVision25/25,adoptedinNovember2010.ThePolicycallsfor25%shareofrenewableenergyintheprimaryenergysupplymixin2025.EnergyVision25/25stipulatesthefollowingprimaryenergysharesfor2025:• Newrenewableenergy:25%• Coal:22%• Naturalgas:23%• Oil:30%.

Energy Vision 25/25 revised the previous primary energy shares, as stated in PresidentialRegulationNo.5of2006regardingEnergyPolicy.EnergyVision25/25callsfor33.85%overallprimary energy reduction from a business as usual (BAU) case, through dedicated energyconservationmeasures.Energyconservationmeasuresareexpectedtoreduceoverallprimaryenergyconsumptionfrom450milliontonsoilequivalentunderaBAUcase,to380milliontonsofoilequivalentintheenergyconservationcase,in2025,whichconstituteenergysavingthroughenergyconservationofabout18%.TheenergyconservationgoalsarefurtherelaboratedinthedraftoftheNationalEnergyConservationMasterPlan,RIKEN.

ThePresidentialRegulationNo. 5/2006 regardingEnergyPolicy affirmed national energypolicygoalsto:• Achieveenergyelasticityoflessthan1(one)in2025;and• Realizeprimaryenergymixin2025,asfollows:

- Oil,lessthan20%- Naturalgas,greaterthan30%- Coal,atleast33%- Biofuels,morethan5%- Geothermal,morethan5%- OtherNewandRenewableEnergy(NRE)andnuclearpower,morethan5%.

ThePresidentoftheRepublicofIndonesiadeclaredattheG-20summitofPittsburghin2009that Indonesia would voluntary reduce GHG emissions by 767million tons or 26% from abusinessasusualcasethroughownefforts(‘nationalcommitmenttoreduceGHGemissions’).Theenergysectorisexpectedtocontribute30milliontonsofthisreduction.Withinternationalsupport,IndonesiaexpectsaGHGreductionof41%.

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II.III.NationalEnergyConservationMasterPlan(RIKEN)

ByLaw,theNationalEnergyConservationMasterPlan(RIKEN)shallbeformulatedbasedontheNationalEnergyGeneralPlan(RUEN).

ThenationalenergyconservationgoalisbasedonEnergyVision25/25energyconservationscenario,whichexpectsprogressiveenergysavingfrom2011to2025,toreachsavingsof85million tonsoilequivalent in2025or18%reduction throughenergyconservationmeasures,comparedtothebusinessasusual(BAU)case.

Thefinalenergysaving targets forenergyuseuntil2025areshown inTable1.Theenergysavingspotentialisderivedfromenergysavingpotentialassessmentsinthesectors.

Energy Saving Targets in 2025: The Economic Sectors83

Energy saving targets for 2025 in primary energy conversion, electricity transmission anddistribution,andrefining,arenegligible.Thisisalsotrueforenergyresourceexplorationandexploitationofprimaryenergyresources.

II.IV.Examples:TextileandSteelIndustry

Theindustrysectoristhemainenergyconsumingsectoraccountingforabout44%energyofallenergyconsumption in Indonesia.According to the Indonesianenergyprojection,energyconsumptionoftheindustrialsectorin2050willincreasefivetimesasmuchasthatin2010.ThereforeEnergyEfficiency(EE)oftheindustrysectoristhemostimportantissuetoreduceenergyusage.

Indonesia isoneof themajortextileproducingcountries intheworldandthetextile industrysubsector has contributed greatly to the economy. However, the textile subsector facesincreasingly toughcompetitionand factors likeenergyconsumption,productivityandqualityplayanimportantroleinshapingtheindustry.Thegovernmentunderstandsthissituationverywellandwishestomaintainanddevelopthetextileindustrybyusingfundingassistancefortheimprovementoftechnologyandmachineryupgrading.Forexample,10%financeforinvestmentofanEEfacilityisofferedbytheGoItotextilecompanieswhocandemonstrateinvestmentinanEEfacilityintheirplant(i.e.intermsofenergyefficientequipment).

The ironandsteel industrysubsectorpromotes the introductionofEE technologiessuchaspreheating,regenerativeburners,hotchargingandsoon.Furthermoretheironandsteelsub-sectorwithencouragementfromtheGoIdevelopedthefollowingEEprograms:

Sector Energy Saving Potential

Energy Saving Target in 2025

Share in Final Energy Consumption

Energy Saving Target in 2025

Industry 10 – 30% 17% 41% 6.9%

Commercial 10 – 30% 15% 5% 0.7%

Transport 15 – 35% 20% 5% 7.4%

Residential 15 – 30% 15% 37% 2.0%

Others 15 – 30% 0% 4% 0.0%

TOTAL 100% 17.0%

Figure 19: Energy Saving Targets in 2025

83 Directorate of Energy Conservation (undated): Draft RIKEN.

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1.Energyconsumptiondiagnosis tounderstandthe levelofenergyconsumption,machineryandtechnologyinthenationalsteelindustry,

2.TechnicalguidanceformulationtosupplyspecifictechnicalassistanceforenergyefficiencyandCO2emissionreduction,and

3.EnergyauditstounderstandtheEEpotentialandactionsinthesteelindustry.

Also, it is highly appreciated that the iron and steel subsector is implementing various EEactions to introducemoreeffective facilitiesandbestpractice technology inconjunctionwithinternationalorganizationsandthroughbilateralcooperation.

III.SettingofStandardsandoftheBusinessasUsual(BAU)Scenario

Indonesiastilldoesnothavesufficientstandardsimplementedtodefineabusinessasusualscenariowhichcanbeusedasareferencepointforenergyefficiencyinvestments.ThesameappliesforaneffectiveandreliableMRVsystem(Monitoring,ReportingandVerification)whichcanbeutilizedamongstothersbythebankingindustry.ForthatreasonbankshavetorelyonthirdpartyinformationtoclarifyifaninvestmentcanbecategorizedasEEinvestmentoriftheinvestmentdoesonlymeetthebusinessasusualcategory.

Figure 20: Emission Reduction Scenarios84

TheIndustrialAct3/2014issettinggeneral(voluntary)GreenIndustryStandards.Italsoaims at defining in the future Green standards for all industries and industrial sectors.Since2010theMinistryofIndustry(MoI)isfeaturinga‘GreenIndustryAward’whereyearlyaround75companiesachievetherequiredhighestlevel(5or4)andmanyhundredsapplybut reach only levels 1-3. The lower levels are considered being underperforming, andrecommendationsforimprovementaregiven.CompanieswhichreceivetheGreenIndustryAwardcomplyintheirentireproductionprocesswiththestandardssetbytheAward;whichmeansnormally theycomplywith the5R’s: reduceemissions, reducewasteand reduceenergy,recycleandreuse.

TheGreenIndustryAwardcanbeanindicationthatthiscompanyisabovetheexistingstandardsandtheirproductionprocesscanbeperceivedasbeing‘green’comparedwithothercompanies.

Emission Reduction Scenarios Respective approaches can be based on:

• Standardized or group-based baseline• Existing nation mitigation policies & standards

• Gol unilateral efforts• Own efforts by SMEs, e .g. low investment (soft loan)

• Measures considered “ambitious” based on abatement costs, financial, technical, behavorial barriers:

- Medium investment- High investment

Business as Usual

Ambitious Baseline

Carbon-linkedincentive scheme

Emis

sion

Lev

el

Time

84 Carbon Linked Incentive Scheme model, undated.

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PresidentialInstructionNo.13oftheYear2011regardingSavingEnergyandWaterisdirectedtoministers,headsoftheinstitutionsofgovernment,governors,regents/mayors,commanderofthearmedforces,andchiefofthenationalpolice,toimplementpoliciesforsavingenergyandwater.ThePresidentialInstructionstipulatesgoalstoachieve20%inelectricitysaving;10%inwatersaving,and10%ingasolinesaving.

IV.RegulatoryRequirements/Standards

ThisAnnexintroducestwoimportantnationalcertificates/licenseswhichassesstheimpactofbusinessoperationson theenvironment: theEnvironmentalLicense(withAMDALandUKL-UPLconstituting the first stepof theapplicationprocess) and the certificationPROPER,asissuedbytheMinistryofEnvironment(KLH).Furthermore,forlargeproject/loansthespecialEnvironmentalImpactAssessmentisbrieflyintroduced.

IV.I.EnvironmentalLicense/AMDAL

CertainbusinessactivitiesinIndonesiawhichimpacttheenvironmentrequireanenvironmentallicense.Theapprovalprocessforsuchalicenseinvolvesthreestages.1.DraftinganEnvironmentalImpactAnalysis(AMDAL)orEnvironmentalManagementEfforts

andEnvironmentMonitoringEfforts(UKL-UPL);

2.Evaluation of the AMDAL or UKL-UPL and obtaining an AMDAL approval or UKL-UPLrecommendation;and

3.ApplicationforanEnvironmentalLicense.

Theapplication for theEnvironmental Licensewill be submitted to the relevant governmentlevel;eitherthenationalMinisterfortheEnvironment,theGovernoroftherelevantProvinceortheRegent/Mayoroftherelevantregency/city.

Indonesia’sEnvironmentLawprovidesthatanAMDALisrequiredforthosebusinessesand/oractivitieswhich,amongstotherthings:• changetheformandcontouroftheenvironment;

• exploitnaturalresources(renewableornon-renewable);

• maycauseenvironmentalpollutionand/ordamageand/ordegradationofnaturalresources;

• resultinnaturalandartificialenvironmental,socialandculturalimpacts;

• impact the sustainability of a natural resource conservation area and/or the protection ofculturalheritage;

• introducenewspeciesofplants,animalsandmicro-organisms;

• produceandutilizenaturalornon-naturalrawmaterial;

• arehighriskactivitiesand/orimpactstatedefense;and/or

• implementnewtechnologieswhicharepredictedtohavealargeimpactontheenvironment.

AMinisterialEnvironmentalDecreealsolistsspecificbusinessesand/oractivitieswhichrequireanAMDAL.Businessesand/oractivitiesthatimpacttheenvironmentbutwhicharenotidentifiedasrequiringanAMDALunder theEnvironmentLaw(including in theEnvironmentalDecree)mustprepareaUKL-KPL.

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AnAMDALdocumentconsistsof:• theTermsofReference;• anEnvironmentalImpactStatement(ANDAL);and• anEnvironmentalManagementPlanandEnvironmentalMonitoringPlan(RKL-RPL).

The document must be prepared by a certifiedAMDAL consultant.As part of theAMDALdocuments,anactivitiesplanmustbepreparedandpubliclyannounced.Thepublicmustbegiventenbusinessdaystoprovidefeedbackontheactivitiesplan.TheAMDALwillbeevaluatedby theAMDAL Evaluation Commission (Komisi PenilaiAMDAL) established at the relevantlevelofgovernment,whichwillissuearecommendationtothatgovernment.Theoretically,theCommission’sevaluationshouldtake125businessdays(includingthetenbusinessdaysforpublicfeedback),howeverinpracticeitmaytakemuchlonger.

AUKL-UPL is required for certain business activitieswhich have a lesser or no significantimpactontheenvironment,butwhichstillrequireenvironmentalapproval.AUKL-UPLhasaprescribedform,whichincludes:• theactivitiesplan;• theenvironmentalimpact;and• theenvironmentalmanagementandmonitoringprogram.

TheUKL-UPLissubmittedtotherelevantgovernmentleveland,accordingtotheenvironmentregulations,adecisiontorecommendorrejecttheUKL-UPLshouldtakeonlytake14businessdays.Onceagain,inpracticetheprocessmaytakelonger.

Somebusinessesoractivities (orboth)donot requireeitheranAMDALoraUKL-UPL,butthesemustsubmitaStatementofAbilitytoManageandMonitortheEnvironment(SPPL)totherelevantlevelofgovernment.ThereisnospecifiedtimeframeforapprovinganSPPLapplication.

OnceanAMDALorUKL-UPLisapproved,anapplicationmustbesubmittedforanEnvironmentalLicense,whichrequires:• theAMDALapprovalorUKL-UPLrecommendation;• theCompany’sDeedofEstablishment;and• acompanyoractivitiesprofile.

Aftersubmissionofcompletedocuments,therelevantgovernmentisrequiredtoannouncetheapplicationforpublicfeedbackoftenbusinessdaysforAMDALapplicantsandthreebusinessdaysforUKL-UPLapplicants.85

TheholderofanEnvironmentalLicensemustmeetthefollowingobligations:• complywiththetermsandconditionsofthelicense;• reportoncompliancewiththetermsandconditionsevery6months;and• providecollateralfundsforanypotentialenvironmentalrestoration.

Breach of an Environmental License may result in sanctions including written warnings,suspensionorrevocationofthebusinesslicense,andenforcedcessationofallactivitiesandenvironmentalrestoration.

A breach may also constitute an act of environmental pollution which is a breach of theEnvironmentLawitself,givingrisetocivilandcriminalpenalties.

85 If a proponent obtained its AMDAL approval or UKL-UPL recommendation before 23 February 2012, the proponent is not required to obtain an Environmental License (with the approval or recommendation treated as the Environmental License).

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It is important to note that the AMDAL approval or UKL-UPL recommendation processinvolvesdialoguebetweentheproponentandtherelevantlevelofgovernment,whichshouldresult in termsandconditionswhicharemutuallyacceptable. Ifcompliancewithsuch termsandconditionsprovesdifficult, or circumstancesotherwisechange, theproponent canseekamendments to theAMDAL or UKP-UPL documents.As such, the author is not aware ofanyhigh-profileprojectswhichhavenotproceededonenvironmentalgroundsorhavebeensuspendedorrevokedbecauseofabreachoftherelevantAMDALorUKP-UPLdocumentsoranEnvironmentalLicense.

IV.II.PROPER

PROPER is an assessment certification by KLH which currently comprises of some 2,000Indonesian companies which were rated andmonitored. There is no clear guidance whichcompanyhastohaveaPROPERrating–itismoreofatop-downdecisionoftheGoIwhohastocomplywiththescheme.CompaniescanalsoappliedtohaveaPROPERratingbutmighthavetowaittobeincludedintheschemeastheMinistry’scapacitiesarelimited.

Ingeneral‘highimpact’companiesarereportedbytheregionalgovernmentstoKLHinordertobeincludedinthemonitoringsystem.AlsoheavypolluterswheretheregionalgovernmenthaslimitedauthoritiestostopthepollutionareshiftedbyregionalauthoritiestoKLH.ViathePROPERcertificationactevenrevokingofthebusinesslicensecanbeaconsequence,incasetheapplicantdoesnotachievetheminimumstandardofa‘blue’certification.

Blue&GreenStandardOursuggestionisthateachcompanywhichismonitoredandcertificatedunderthePROPERsystem has to have at least the ‘blue’ rating in order to qualify for a Sustainable Financeclassification (see table below).With that suggested regulation banks are ‘punished’ by notbeingablesoclassifycompaniesforGreenandSustainableFinancewhichprovidefinancingtocompanieswhichdonotfulfilltheminimumrequirement.

GoldStandardThereareonlyafew(lessthan20)companieswhichcurrentlyhavethe‘gold’standard.It issuggestedthatallloansgiventothesecompaniesareautomaticallybeclassifiedasSustainableFinanceas longas the loans support theongoingefforts to keepand increase their effortstowardsasustainableproductionandproducts.ItwillgiveanadditionalincentiveforcompaniestostriveforaGoldstandard.

Red&BlackStandardIrrespectiveofwhatcompaniesinvestinordo:ifacompanyhasaredorblackratinginPROPER

loans given to such companies cannot beclassifiedtobe‘green’–eveniftheinvestmentisdonetoachieveahigher,greenerstandardoraretargetingrenewableenergy.86

IV.III. Environmental Impact AssessmentforLargeLoans

If banks provide for clients so called largeloansthenthebankdonotonlyhavetocheck

Figure 21: PROPER

86 For details see http://proper.menlh.go.id/proper%20baru/Eng-Index.html, accessed on 10 September 2014.

PROPER: Effects of Rating on Corporate Policies?

Gold Green Blue Red Black

GoodPerformer

Non-Performer

Sufficient

Compliance - Beyond/Non

Reputation - Incentives - Disincentive

55

iftheAMDALisinplaceandifapplicableaPROPERratingofatleast‘blue’isachievedbutitthenhasalsotocheckifanenvironmentalimpactassessmentwasdone.

BankIndonesiaAct10/1998obligatesbankstoconductanenvironmentalimpactassessmentforlargeloansorhighrisksloans.Regulation2004concerningassetqualityaddsthatanenvironmentalassessmentshouldbepartoftheoverallcreditassessment.Measurestakenbythedebtortoprotecttheenvironmentshallparticularlybeintegratedinbusinessprospectcalculations.87

V.SuggestedSustainableFinanceClassificationandReportingSystem

Fora‘bankable’applicationoftheSustainableFinancedefinitiontheindividualmotivebehindaspecificinvestmentprojectislessimportant.Importantisthatbanksmonitorsuchdevelopmentsand identifyareasandpatternswhichcan increase their lendingactivities. Itshouldalsobeconsideredbythebankingindustrytodevelopcentersofcompetenceforeachspecificareaastheyareallnewandbringbesidesnewbusinessopportunitiesalsonewriskswiththem.TheseriskswillnotonlycomefortheborrowerswhichinvestinthesenewtechnologiesandtrendsbutalsofortheborrowerswhichdoNOTinvestintheseareasbutwhichmightthenultimatelybeendrivenoutofcompetitionorhaveacompetitivedisadvantagevis-à-visfirstmovers.

In order to have robust statistical data which provides a fast and reliable overview aboutSustainableFinanceOJKshouldbeinapositiontohaveadatabasewhichcandeliverthedatafastanddetailedenoughformostoftheinquiries.Ontheotherhanditshouldalsobeeasytobehandledandimplementedbythebankingindustry.

InasurveyconductedbyOJKinmid-2014nearlyallparticipatingbankshaverepliedthattheysupport the idea and see benefits of introducing amonitoring and classification system forSustainableFinanceloans.Thatshowsthatthereisanacceptanceintheindustryforsuchaclassificationandreportingsystem.

Itissuggestedtouseonecodewhichcoversmostoftherelevantdatainasinglenumber.Thiscodecanbeeasilyincludedinthemonthlyreportingsystemandisforthatreasonconstantlyuptodate.Thesuggestedformatisjustanexampleonthemethodology–itcanbeextendedwithmoredetailsasperOJKrequirement.

Pleaseseethefollowingexamplebasedonanexcelspreadsheet:88

Figure 22: Sustainable Finance Classification System

#Client

Segmenta-tion

# Industry Sector # Tenor # Loan Size # Collateral #

Client relation-

ship# Loan # PROPER

rating # Sector # Sub-Sectors Examples

1 SME 1 1 = Textile 1 1 = Working Capital 1 1 = <100mio

IDR1

1 = new Mortgage/Fixed Assets

1 1 = exist-ing client 1 1 =

Increase 5 5 = Gold 1 Renewable Energy 1 Biofuels Biodiesel

from CPO

3 Commercial 2 2 = Steel 22 = Loan Tenor up to 3 years

22 = >100mio

< 1bn IDR2 2 = new Short

term assets 2 2 = new client 2 2 = New

facility 4 4 = Green 2 Biomasseg. in the Palm Oil Industry

4 Corporate 3 3 = Cement 33 = Loan Tenor 3-5 years

33 = >1bn

< 10bn IDR3

3 = within existing collateral

3 3 = overall reduction 3 3 = Blue 3 Geothermal

5 SOE 4 4 = Pulp&Paper 4

4 = Loans

Tenor >5 years

4 4 = >10bn IDR 44 = within existing facility

2 2 = Red 4 Flare Gas usage

Oil & Gas Industry

6 Others (Cooperative) 5 5 = Palm

Oil 55 = >10bn -

< 100bn IDR1 1 = Black 5

Mini Hydro

<10MW

7

Banks, Financial Institutions, NBFI

6 6 = Food processing 6 6 = 100bn-

1trillion IDR 6 Hydro >10MW

Micro, Mini Hydro, Hydro Power Plants

7 7 = Power Generation 7 7 = 1trillion IDR 7 Solar/

Photovoltaic PVIPP’s

88 = Con-struction/Building

8 Tidal and other ocean

9 Wind

87 Bank Indonesia 2005, Article 11.1.

88 Source: own.

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VI.PotentialSustainableFinanceActivitiesVI.I.Overview

A Green Economy which should be supported by Sustainable Finance normally includesamongstothersthefollowingmaincomponents:

1)Low-emissionEnergyGenerationandSupply Thecentralideaistoshifttheenergysupplyfromfossilfuelstolesspollutingalternatives,

either for electricity generation (hydropower, geothermal, wind, photovoltaic, biogas orbiomasspowergeneration)orasdirectsourceofenergy(biofuelforexample).

2)EnergyEfficiency(EE) EEincludestechnologiesthatreducetheamountofenergyrequiredtoprovidegoodsand

services.• Intheelectricitysectorthescopeisforimprovingefficiencyinpowergeneration(moving

fromsubtosupercriticalcoalforexample)andtransmissionanddistribution(usingmoreefficientgridsandsmartgridtechnology).

• In thetransportationindustry there isalsopotential forefficiencygains, includingtheutilizationofmorefuel-efficientcars(like‘hybrids’)andimprovedmasstransit.

• In industrial equipment, efficiency gains can be achieved through energy efficientmachineryandimprovedwastemanagement.

• Inthebuildingandconstructionindustryenergyefficiencycanbeenhancedthroughimprovedinsulationandcoolingsystems.

3)PollutionReduction/Avoidance Thiscoverstechnologiesreducingthepollutionoftheair,waterandsoilacrossallindustries

andsectors,withafocusonGHGemissionreductionsandwaterandairpollutionavoidance.

AsIndonesia’seconomyisstilldeveloping,andasinvestmentsinhightech/state-of-the-artenergyefficientequipmentandtechnologiesareofteneconomicallylessfeasibleithasalsotobedefinedwhichbenchmarkwillbeusedtodetermineifaninvestmentis‘green’.TheBAUconceptcouldbeused(seeAnnexII).

4)CarbonCaptureandSequestration(includingdeforestationandagriculture) As these areas do not play yet a role for the Indonesian banking sector and its lending

portfolio/strategythesetopicsarenotcoveredinthisstudy.

VI.II.LenderandBorrowerSegmentation

ThesuggesteddefinitionofSustainableFinancedoesnotdistinctbetweenthevariouslendinginstitutions.Thedefinitionwillapplyforallfollowinginstitutionsastheyprovidefinancingtotheeconomyandbusinessprojects:• Banks

• ShariahBanks

• MultiFinanceCompanies

• ConsumerFinanceCompanies

• LeasingCompanies.

Equally,theSustainableFinancedefinitionandclassificationcanbeusedforalldifferentclientsegmentswhichIndonesianbankshave:

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• Corporates• ProjectFinance• SMEFinancing• Microfinance• Cooperatives• State-OwnedEnterprises• ConsumerBanking/RetailBanking• Households• Greenhousingconcepts/developers• ‘Green’householdappliances• PublicSector.

Itisnotimportantwhoistheborrowerandinwhichclientsegmentthebankshaveclassifiedhim, important is thepurposeof the lendingand if the lendingactivity for this client canbeclassifiedasSustainableFinance.

VI.III. Low-emissionEnergyGenerationandSupply

Considering the overarching importance of energy supply and consumption for SustainableFinance further assistance is needed to classify the respective investment projects.Suchaclassificationhastoprovidebankswithclearguidelines.HavingtheoverallpoliticalcommitmentoftheGoIinmind,andwithforthesakeofstraightforwardnessallinvestmentswhichsupportsuchrenewableenergyprojectsshouldbeclassifiedasalsobeinggreen(e.g.roadsandbridgestobebuilteventhroughforestcanstillbeconsideredasbeinggreeniftheyarepartofarenewableenergyproject,e.g.forageothermalpowerprojectinaremotearea).

ThemainRenewableEnergyTechnologiesare:• Geothermal •Biomass/Biogas• Photovoltaic •Biofuels• Hydro •Flaregasusage.• Wind

Thefollowingplanshowsthepotentialofrenewableenergyinthefutureenergymix.ConsideringthatmanyoftheseprojectswillbedoneasIPPthereisalotoffinancingdemandupcomingfortheseprojects.Banksshouldprepareforthatdemandandbuildupcapacitiesinordertobeabletoassessandfinancesuchprojects:

Development Plan of Small Scale Generation Utilizing Green and New Energy89

RE Plant UnitYear

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 TOTAL

Mini Hydro MW 29 37 198 126 46 193 203 214 225 235 1,500

Solar PV MW 2 30 50 60 70 70 75 75 80 80 592

Wind Power MW 0 0 10 10 15 15 20 20 25 25 140

Biomass MW 16 33 35 35 35 40 40 45 45 50 374

Sea Current MW 0 0 2 0 0 5 5 5 5 5 27

Bio-Fuel MW - 10 15 15 14 8 7 7 8 9 93

Coal Gassification MW 6 32 81 43 22 7 22 14 6 10 243

TOTAL MW 47 142 391 289 202 338 372 380 394 414 2,969

Figure 23: Development Plan of Small Scale Generation Utilizing Green and New Energy

89 PLN presentation (2012): ‘THE 2nd CLEAN POWER ASIA CONFERENCE & EXPO 2012’, Bali.

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Renewable Energy Potential in Indonesia90

VI.IV. EnergyEfficiencyInvestments

Energyefficiencyisanotherfocusareaofthegovernment.Astandardformulasaysthatit isthreetimesmoreexpensivetofinancetheproductionofenergythanforinvestmentswhichsaveenergy–sorathertoproduceconstantlymoreitismoreeconomicalandmoreenvironmentallyfriendlytousetheproducedenergymorewisely.

AnnexVIIwillprovideexamplesofenergyefficiencyinvestmentsforvarioussectors.Forthatreason the principle of energy investments is elaborated further on a general level,withoutgoingintospecifics.

TheunderlyingprincipleofEnergyEfficiencyinvestmentsisthattheinvestmentpaysbyitselfviathesavedenergycost.Thepaybackperiodoftheinvestmentisdeterminedbytheenergycostsaved.Thetwofactorswhichplayaroleisa)thecostoftheenergyandb)theamountofenergyused.Typicalpay-backperiodsarebetweenoneandfiveyears,dependingontheinvestmentterms.

EnergyEfficiency–obstaclesforimplementation:

InvestmentsinEnergyEfficiencyareoftencutoutforvariousreasons:• Otherinvestmentssuchasinproductionincreaseorqualityimprovementenjoypriorityand

takeuptheentireinvestmentbudget.

• Therearedoubtsbythemanagementofthecompanythatthecalculatedsavingsinenergywillreallymaterializeastheequipmentmanufacturersandtheirsalesstaffsoften‘overstate’thesavings.

• No historic detailed energy consumption data for existingmachinery is available - whichwouldmaketheinvestmentanditsimpactmoretransparent.

• Changeinequipmentduringtheproductionperiodbearstheriskofproductioninterruption,isoftenaccompaniedbychangesintheinfrastructure(suchasutilitysupplylinesetc.)andbrings‘dustanddirt’intotheproductionarea.

• Fear that thenewequipmentwillnotperformaspromised,and integration in theexistingproductionlinewilltakelongerasplanned–whichmighteatupthefuturesavingsbylossofproduction.

• Fearoflossofcompetitiveness–equalplayingfield.Aslongasthereisnoregulationtocomplywithfewcompanieswantstobeanearlymoverandwill taketheriskof the investment–whichultimatelywillonlyreducecostinthefutureafterthepaybackperiodoftheinvestment.

Energy source Installed capacity Resource potential Undeveloped potential (%)

Hydropower 4,264.0 MW 75,670 MW 94

Geothermal 1,052.0 MW 27,510 MW 96

Mini-hydropower 86.1 MW 500 MW 83

Biomass 445.0 MW 49,810 MW 99

Solar 12.1 MW 4.8 kWh/m²/day -

Wind 1.1 MW 9,190 MW 99

Ocean 0.0 MW 35 MW 100

Figure 24: Renewable Energy Potential in Indonesia

90 Ibid.

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• Aslongasenergypricesaresubsidizedand‘low’,thepaybackperiodsarestilltoolongfordomesticinvestorswhichaccepttypicallyonlypaybackperiodsoflessthanthreeyearsforsuchinvestments.

• Investmentswilleatintoexistingcreditfacilitiesasbankstendtoaskforadditionalcollateralfornewloans,andinvestmentsintoenergyefficiencycannotbeusedascollateral(e.g.LEDlightingchangeinabuilding,variablespeeddrivesetc.).91

Banksalsodonotsee thebusinesspotentialwhich lies in thissegment.Variousstudies fortheIndonesiantextileindustryhaveshownthatthemachineryparkisinaveragemorethan20yearsoldandurgentlyneedsmodernization.IfbankstapintothatmarketandseemoretheopportunitythantheriskitwillopenupforadditionallendingactivitiesandwillpushSustainableFinanceintotheirlendingstrategy.Specificallyheresmallimprovementscanleadtosubstantialreductionsofenergyconsumption,aswellastowastereductionandavoidance.

ItwillneedachangenotonlyintheeducationofbankersbutalsointheircreditandlendingguidelinestofinanceinvestmentsinEEunderdifferentrulesthan‘normal’investments.

WhencanreplacementofequipmentbeclassifiedasEEinvestment?

Typically every new equipment with latest technology is more energy efficient than olderequipment. For that reason some guidelines have to be developed when a replacementinvestmentcanbeclassifiedasEEinvestment.

Thefollowinggeneralruleissuggested:Iffunctionalequipmentischanged/replacedjustbecauseitmakesovertimesensebecausetheenergyconsumptionofnewequipmentissignificantlylowerthantheexistingequipmentitcanbeclassifiedasEEinvestment.

Atypicalexampleischillersforairconditioning.Chillerscanrun25-30yearsbutoldmodelsareveryenergyconsuming(specificallyifbuildandinstalledbefore2004asfrom2005onwardstherewasachangeintechnologytowardsbetterefficiency).Soifachillerisstillrunningbutwillbereplacedwiththelatesttechnology(atypicalpaybackperiodisbelow3years)theloanforsuchaninvestmentcanbeclassifiedasSustainableFinance.

AhintforthemotivationofreplacementcanbeanEnergyAudit.IfanenergyauditrecommendscertaininvestmentsthentheseinvestmentsshouldbeclassifiedasSustainableFinance.Hereit is recommended not to be target a specific percentagewhich should be achieved. Evensmallersavings inenergyconsumptioncanmakean impact ifmanycompaniesdo it.Moreimportantthantoshowbignumbersistoshowactivityandimplementationofenergysavingrecommendationstochangethemindsetwithinthecompanyandsociety.

Importantforthebankingindustryistorecognizethatsuchinvestmentstypicallyneedfinancing.IncasetheyaredoneforEEreasonsthat’sanewbusinessareatoprovidelendingfor.It isalsoimportanttounderstandforthebankingindustrythatclientswhoreducecostgoingforwardshould bemore competitive and fit for the future than clients who keep old and inefficientequipmentuntilithastobereplaced.

91 Banks have so far not adopted the approach that the energy saving itself can be used as source for the installments (interest + repayment). Clients would like to see that their financing leverage can be increased without collateral based on the saved energy cost model.

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VI.V.Critical/ProblematicVentures

Guiding principle of the definition of Sustainable Finance is to look into the purpose of thefinancing.Irrespectiveoftheindustryoroftheroleoftheapplicantbankshavetoassessthepurposeoftheloan.Iftheloanforaninvestmentsupportsanimprovementfortheenvironment(seeabove) it canbeclassifiedas ‘green’.OJKplans to introduceata laterstageSectoralGuidelineswhatSustainable/GreenFinancemeansforindividualsectors.Forthesakeoffuturediscussionssome‘critical’sectorsandbusinessareasarediscussedbelow.

Thefollowingflowchartexplainstherationalesupportingourdefinition:

GuidingPrincipal:

InanumberofEnergyEfficiencyFinancingschemesaminimumtargetof20%energysavedfortheentireprojectcomparedtothebusinessasusual(BAU)lineisrequiredtoqualifyforthescheme(seealsoAnnexII).Inmanycasesthiswillbeachievedasaveragefortheentireprojectbuthavingcomponentswhichareabovethe20%andsomewillbebelowthatbenchmark.In

Company: Does the company comply with existing environmental regulations? AMDAL in place? If applicable: PROPER

rating of at least ‘blue’?

Irrespective of the purpose of the loan/financing:

The project can NOT be classified as Sustainable Finance by the lender.

Can the project be classified as ‘Sustainable Finance’?

There are positive indicators which can give a hint that the lending can be linked to Sustainable Finance but it still needs an evaluation if it is really the case:

Energy Efficiency - indicators for a ‘green’ motivation driving the investment:

- existing ‘working’ equipment is replaced with latest energy efficient technology;- the investment was recommended as result of an Energy Audit;- payback period is calculated based on the energy cost saved; or- technology bought is certified/labeled as more energy efficient than comparable products.

Positive Indicators on Project Level (examples):

The financing is directly related to projects in: - Renewable Energy;- Energy Efficiency;- Waste/Pollution reduction;- Eco Labeling/Certification;- Other certification which is related towards a

sustainable investment (e.g. Green Building Principles applied and Green Building Certification desired); or

- Investments to achieve Eco Hotel Label Certificate.

Positive Indicators on Company Level (examples):

- Company has PROPER Gold or Green status and has demonstrated already that they are serious in environmental issues and undertake efforts which are beyond the requested standard;

- Company has Eco Labels for their products/ production which require also a positive attitude towards its environmental impact;

- Company has already obtained international awards related to environmentally friendly production; or

- Company has undertaken an Energy Audit and is implementing the recommendations.

NO

YES

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ordertoencourageinvestmentsinEEitisrecommendedthatalowerlevelofenergysaving–recommendationis15%-willstillbesufficienttoqualifyforSustainableFinance.

FormanyinvestmentsspecificallyintheareaofEnergyEfficiencytherewillbedoubtsifthereisindeedareductioninenergyconsumptionorifit isjustareplacementofoldmachineryorefficiency increase investmentswhich comewith some energy saving.Guiding principle forsuchcasesshouldbetheinformationgivenbytheborrowerwithsomesupportingarguments(e.g.fromthemanufacturerwhichhighlightstheenergysavingoftheequipmentcomparedwithotherproductsavailableinthemarket).

Itisconsideredoverstressingbankcapacitiestoexpectathoroughpre-creditcheckoftechnicaldetails.Importantisthattheborrowersconsidertheenvironmentalimpactoftheirinvestmentandcanarguewhyitcanbeclassifiedasbeingagreenproject/purpose.

The two most controversial industries/sectors with huge investments will be the plantationandminingindustry. Indonesiaastheworld leader inPalmOilproductionandwith itshuge(coal)miningindustryisheavilydependentonthesegoodsassignificantcontributorstoexportrevenues,employmentandassourcesofenergy.Bothareasareinternationallyperceivedbeing‘notenvironmentallyfriendly’.

ForIndonesianbankstheseindustriesanditssuppliersandoff-takersareveryimportantandrepresentasignificantshareoftheir lendingportfolio.Inthefollowingparagraphwewill lookdeeperintothesesectorsandexplainwhatcanbeclassifiedasgreenlending.

All investments which are done by existing (palm oil) plantations/millswhich improve theenergy efficiency e.g. of the oilmills, reducepollutionorwaste or produce renewableenergybasedonthepalmoilplantationproductsetc.canbeclassifiedas‘SustainableFinance’.ConditionshouldbethattheplantationhasasminimumrequirementavalidIndonesianPalmOilSustainabilityCertificate.

Loansforinvestmentsininfrastructuresuchasroads,bridges,newseedlings,cars,trucksetc.canNOTbeclassifiedasSustainableFinance.Guiding principle: the purpose of the financing will determine if it can be classified asSustainableFinance.Evenwithina‘dirty’ industrytheremightbeprojectswhichimprovetheenvironmentorreducepollution.

Coal is the dominant source of energy production in Indonesia andmany coal fired powerplantprojectsarefundedbylocalbanks.Asignificantportionofthesepowerplantsareoldortechnicallyoutdatedandcanbere-furbishedtobemoreefficient,henceGHGemissionscanbereduced/captured.Itissuggestedthateveryimprovementinefficiencyofacoalfiredpowerplantandeveryinvestmenttoreducetheemissions(e.g.installationoffilter)canbeclassifiedas‘GreenLending’.Guiding principle: the purpose of the financing will determine if it can be classified asSustainableFinance.Evenwithina‘dirty’ industrytheremightbeprojectswhichimprovetheenvironmentandreducepollution.

TheGoIhasdefinedambitious targets for theutilizationof biofuelsasadditive to the fossilfuelor tobeusedonastandalonebasis. Inorder tosupport that targetall investments intobiofuelsshouldbeclassifiedasSustainableFinancedespite theongoinggeneraldiscussionifitisethicaltousefoodasfuelorfuelsubstitute.Thedevelopmentofabiofuelindustryisin

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generalpositiveandshouldbesupported.ItcanbeexpectedthatovertimetherawmaterialwillshiftfromCrudePalmOil(CPO)alsotowardsothercrops.

Apositiveindicatorcouldbethatthecompanyhasforitsproductsinternationalecolabelsorthesourceoftherawmaterialisalsocertifiedtobeenvironmentallysustainable.

Potential Bioenergy Resources92

Investments in industrial forests can be classified as Sustainable Finance provided thenecessary licenses of the GoI are in place. Such forests typically serve the Pulp & PaperindustryorareusedasalternativefuelwhichisinternationallynotalwaysperceivedasbeingenvironmentallysustainablebutitplaysanimportanteconomicroleinIndonesia.IthastobeassumedthattheGoIhastakenallenvironmentalandsocial(E&S)aspectsintoconsiderationbeforeissuingthelicensesneeded.

Positive indicatorscouldbe that thecompanyhasapplied for internationaleco labelsor thesourceoftherawmaterialiscertifiedtobeenvironmentallysustainable.

Nuclear:NotofrelevanceinIndonesiaforthetimebeing.

Coal-bedmethane(CBMorcoal-bedmethane),coal-bedgas,coalseamgas(CSG),orcoal-minemethane(CMM):Forthesetechnologiesthereshouldbedoneanindividualassessmentontheenvironmentalimpact(specificallyifanE&Sstudyisavailableandnotnegative).Onlyifthereisstrongevidenceprovidedbysupportingdocumentsthatitisenvironmentally‘better’thanotherfossilfuelsitshouldbecategorizedasgreenlending.

EnergyEfficiency investmentsaspartofa largescale investment:Notall investmentsintolargescaleprojectscanbeclassifiedasSustainableFinance.OnlythepartswhichcanbedirectlyrelatedtoinvestmentsinEnergyEfficiency,RenewableEnergyGenerationoranothercategoryof the introductionof thisAnnex canbe classifiedasSustainableFinance.Anun-bureaucraticsimpleapproachshouldbeusedfortheclassification.

Newprojectswithstateoftheart‘green&sustainableequipment’arefromitsenvironmentalimpactveryambitiousandtheyarebeyondtheBusinessasUsual(BAU)scenario.ThesecanbeclassifiedasSustainableFinance(asmentionedindicationcouldbee.g.adesiredGreenBuildingGoldorPlatinumStandardforaCommercialBuildingProject).The‘levelofambition’willneedtobesignificant.InvestorswillhavetoshowthatthechosenstandardisfarbeyondaBAUbaselineandabovecomparableinvestments,reflectingexistingnationalmitigationpoliciesaswellasapplicablestandards.Onlyifadditionalmitigationeffortsareimplemented-leading

Fuel CPO production 24 million ton for food, export and fuel

Production of molasses 1.5 million ton, cassava 14 million ton

Biogas(household)

The potential for biogas mostly from manure and other organic materials

In 2009, Indonesia had a relatively large livestock, including 13 million dairy cows and cattle, as well as approximately 15.6 million goats; the potential of equivalent of million units of biogas digester

Power generation

Huge potential of biomass from agricultural waste, plantations, and urban wastes of power generation.

Figure 26: Potential Bioenergy Resources

92 Source: own.

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tomore ambitious emission reductions than unilateral efforts by theGoI (e.g. newpolicies/standards)theclassificationasSustainableFinancefortheentirenewprojectcanbegiven.

LowCostGreenCars(LCGC)shouldnotbeconsideredtoqualifyforSustainableFinanceasitdoesnotpromoteordemandsophisticatednewtechnologiesorenergysavings.Inmostitisjustashifttosmallercarswithsmallerengines–hencelowerfuelconsumptioncomparedwithbigcarsbutnotcomparedwithitspeers.Ontheotherhand,Hybridcars,Electrocarsandgasfiredvehiclesfulfilltheoutlinedrequirementsoftheclassification;hencetheyqualifyforSustainableFinance.

Sustainable / Green Tourism:As there are already a number of certifications and auditsavailableforthisindustryonlycertified‘GreenTourism’projectsandinvestmentsintoitcanbeclassifiedasGreenInvestments.Guidingprinciple:thepurposeofthefinancingwilldetermineifitcanbeclassifiedasSustainableFinance.E.g.thefinancingofreplacementofenergyintensivelightingwithLEDlightingcanbeclassifiedasSustainableFinance,whereas the replacementofold furnitureagainstmoderninteriorhasnothingtodowiththetopic,evenwhenthehotelhasanEcoTourismlabel.

VII.SectorExamplesonEnergyEfficiencyandRenewableEnergyTechnologies93

Industry/ManufacturingSectorsinGeneralThefollowingaresomekeyopportunitiesforimprovedenvironmentalperformancewithrespecttoenergyutilizationinindustryrespectivelythemanufacturingsector:• Cleanerfuels:currentfuelscouldbereplacedwithalternativefuelsthathavelowercarbon

and/orGHGemissionsperunitofenergy.Thisopportunityalsoincludesself-generationofenergywithrenewableresources(biomass,solar,wind,andgeothermal).

• Combined heat and power (CHP): a form of distributed generation also referred to as‘cogeneration’, a CHP system increases energy efficiency through onsite production ofthermalenergy(typicallysteam)andelectricityfromasinglefuelsource.

• Equipmentretrofit/replacement:energyefficiencycouldbeimprovedbyretrofittingorreplacingexistingequipmentusedforonsiteheatorpowergenerationanddistribution,manufacturingprocesses,ormeetingfacilityrequirementssuchaslightingandheating,ventilating,andairconditioning(HVAC).

• Process improvement: process improvement or optimization refers to either a wholesaleprocesschangethatrequireslessenergyforasimilar levelofmanufacturingoutputoranadjustment to the manufacturing process that increases energy efficiency. The processimprovementcategoryalsoincludesimplementationofbestpracticesinenergymanagement.

• ResearchandDevelopment(R&D):R&Dcouldfocusondevelopingnewenergy-efficientorcleanenergytechnologiesandprocessesthatcouldbecommercializedwithinthenextonetotwodecades.

BuildingTechnologiesBuildings with old chillers (installed before 2004) have been identified as ideal target tosignificantly reduce the energy consumption. It can be assumed that energy savings >30%p.a.areachievedwhensucholdchillersarereplacedbymodernnewchillersanditscoolingsystems.KLHhasalistof160buildingswitholdchillerswhichhavebeenidentifiedinthepast.Thesechillersaremainlyinhotels,malls,hospitalsandpublicbuildings.

93 OJK plans to introduce Sectoral Guidelines at a later stage of the regulatory process of introducing Sustainable Finance. This Annex anticipates some of the sectoral requirements, needs and challenges.

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FurthermorethefollowingapplicationsdopotentiallyqualifyforSustainableFinance:• Lighting(LED,ballastimprovement)andshading• Ventilating• Doubleglassedwindows• Insulation• Solarheaters.

MachineryAcrossallIndustries• VariableSpeeddrives94• Automatedmotors• Heatrecoverysystems• Insulation(heating/cooling)• Energyusagemonitoringsystems• Wastereduction• Emissioncapturingsystemssuchasfiltersorcatalyticconvertors• Energyefficientcoolingfacilities• Investmentsingasenginesorgasturbines• ModernBoilers.95

Transportation• UsageofLNG/CNG• ElectriccarsandHybridcars• Publictransportsystems• Investmentinrailwaysystems• Smartgridinvestments.

Others• FinancingofESCOswhichinvestinenergyefficiencyprojects• Allprojectswhichreplacetheusageoffossilfuelorcoalbygas• CoaltoGas• CoaltoLiquids.

94 The Textile Industry was also identified as an important industry for Indonesia where the companies have underinvested in modern equipment and technology in the past and where significant energy saving potential exists e.g. in heat recovery systems, lighting, variable speed drives and automated motors.

95 The Steel Industry has also huge energy potential in heat recovery, automated motors, variable speed drives and insulation technology.

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VIII.ListofAbbreviations

AFOLU Agriculture,Forestry,andLandUseAMDAL Analisisdampaklingkungan/EnvironmentalImpactAssessmentAOG ActofGod

BAPPENASKementerian Perencanaan Pembangunan Nasional / Badan PerencanaanPembangunanNasional/MinistryofNationalDevelopmentPlanningRepublicofIndonesia

BAU BusinessAsUsualBCB CentralBankofBrazilBI BankIndonesia/IndonesianCentralBankBNI BankNegaraIndonesiaBoC BoardofCommissionersBoD BoardofDirectors

BPPTBadanPengkajiandanPenerapanTeknologi/AgencyforAssessmentandApplicationofTechnology

CAPEX CapitalExpenditureCEO ChiefExecutiveOfficerCFC ChlorofluorocarbonCBM Coal-BedMethaneCBRC ChinaBankingRegulatoryCommissionCHP CombinedHeatandPowerCMM Coal-MineMethaneCNG CompressedNaturalGasCPO CrudePalmOilCSG CoalSeamGasCSR CorporateSocialResponsibilityDIE DeutschesInstitutforEntwicklungspolitik/GermanDevelopmentInstituteE&S EnvironmentalandSocialEE EnergyEfficiencyEP EquatorPrinciplesEPFI EquatorPrinciplesFinancialInstitutionsERM EnvironmentalRiskManagementESCO EnergySavingsCompanyGABV GlobalAllianceforBankingonValuesGBP GreenBondPrinciplesGDP GrossDomesticProductGHG GreenhouseGasGIZ DeutscheGesellschaftfürInternationaleZusammenarbeitGOGII GreenOilandGasIndustryInitiativeGoI GovernmentofIndonesiaHVAC Heating,Ventilation,andAirConditioningIDFC InternationalDevelopmentFinanceClubIFC InternationalFinanceCorporation

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IPP IndependentPowerProducerKLH KementerianLingkunganHidup/MinistryofEnvironmentRepublicofIndonesiaLED Light-emittingdiodeLCGC LowCostGreenCarLNG LiquefiedNaturalGasMEMR MinistryofEnergyandMineralResourcesMRV Monitoring,ReportingandVerificationNGO Non-GovernmentalOrganizationNPL Non-performingLoansNRE NewandRenewableEnergyOECD OrganizationforEconomicCooperationandDevelopmentOJK OtoritasJasaKeuangan/FinancialServicesAuthority(Indonesia)PKBL PartnershipProgramandCommunityDevelopmentPLN PerusahaanListrikNegara/State-ownedElectricityCompany

PROPERProgram Penilaian Peringkat Kinerja Perusahaan / Enterprise PerformanceRatingProgram

RAN-GRKRencanaAksiNasionalPenurunanEmisiGasRumahKaca/NationalActionPlanforReductionofGreenhouseGasEmissions

RED RegionalEconomicDevelopmentProgramREDD+ ReducingEmissionsfromDeforestationandForestDegradationplusR&D ResearchandDevelopment

RIKENRencana Induk Konservasi Energi Nasional / National EnergyConservationMasterPlan

RPJMRencanaPembangunanJangkaMenengahNasional/NationalMid-termDe-velop-mentPlan

RSMD Riot,StrikeandMaliciousDamageRUEN RecanaUmumEnergiNasional/NationalEnergyGeneralPlanSBV StateBankofVietnamSME SmallandMediumEnterpriseSNI StandarNasionalIndonesia/IndonesianNationalStandardSOE State-OwnedEnterprise

UKL-UPLUpayaPengelolaan LingkunganHidup danUpayaPemantauan LingkunganHidup/EnvironmentManagementandMonitoringEfforts

UN UnitedNationsUNEP UnitedNationsEnvironmentProgramme

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