ASEAN KEY DESTINATIONS
The role of banks in environmental development
The Indonesian economy recorded relatively stable growth in the period from 2009 to 2013 with an average annual rate of 5.9 percent. However, this growth marked even higher growth in energy consumption during this period, at an average of 7.1 percent per year, outpacing economic growth.
This means to support economic growth of 1 percent, even greater growth of energy consumption was required, amounting to 1.2 percent. In addition to that, we must not lightly dismiss the deterioration of the environment wrought by this situation. According to the World Resources Institute data, Indonesia was the sixth-largest emitter of carbon dioxide in the world after China, the US, the EU, India and Russia in 2011.
In the period from 2006 to 2010, Indonesia also recorded the highest growth in carbon dioxide emissions among the ASEAN-5 countries (Indonesia, Malaysia, Thailand, Singapore and the Philippines), at an average of 5 percent per year. Actually, the Indonesian government already has a series of regulations to promote sustainable economic development. An example of these regulations is Presidential Regulation 5/2006 on national energy policy to achieve energy elasticity of less than 1 in 2025. There is also Presidential Regulation 61/2011 on the national action plan to reduce greenhouse gas emissions. However, progress on the achievement of these targets appears to be slow with regard to the aforementioned figures.
Recently, the Financial Services Authority (OJK) published a roadmap on green finance, which aimed to outline the conditions needed to achieve sustainable finance in Indonesia in the medium and long term, as well as to determine and develop milestones showing improvements related to sustainable finance.
This roadmap is to be appreciated knowing that the Indonesian economy currently still exhibits wasteful traits in terms of energy usage as well as environmental degradation.
If you look at the financial markets in Indonesia today, banks still play a dominant role in providing financing to the economy. Data from the Indonesia Stock Exchange (IDX) on the recapitalization of public offerings of both stocks and corporate bonds indicates that from 2010 to 2014 an average of Rp 106.15 trillion (US$8.17 billion) in issues was offered.
Meanwhile the banking sector during the same period was able to add total loans at an average of Rp 447.2 trillion every year. In terms of assets, Indonesian banks still retained the largest value in 2014, at Rp 5,615 trillion. Furthermore, Indonesia’s capital market assets as recorded in the Indonesian Central Securities Depository and assets of non-bank financial institutions stood at Rp 3.2 quadrillion and Rp 1.5 quadrillion respectively (as of September 2014). This shows that financial markets in Indonesia are still dominated by the banking sector. Therefore, banks can actually be the key to sustainable economic development in Indonesia.
However, the performance of banks in green financing is still low. A survey of 29 banks conducted by Bank Indonesia (BI) in 2012 showed the banking portfolio for green financing amounted to only 1.28 percent of surveyed bank total credit. This green portfolio was dominated by mini-micro hydro financing. Moreover, judging from a survey conducted by BI of 16 dominant banks in Indonesia in 2012, only 31.3 percent had a policy on green banking. BI’s regulations have actually paid a fair amount of attention to the importance of environmental matters. For example, BI Regulation No. 14/15/PBI/2012 requires that banks must consider the efforts made by debtors to preserve the environment as an aspect of credit quality assessment. But it seems that to increase the role of banks in green financing, relying solely on such regulations is not enough.
The financial sector, especially banking, in Indonesia could play a bigger role in encouraging sustainable economic development. According to research from Deplhi International Ltd. titled “The Role of Financial Institutions in Achieving Sustainable Development” presented to the European Commission in 1997, one of alternative definitions of sustainable development is a process of development that leaves at least the same amount of capital, natural and man-made, to future generations as current generations have access to.
This makes it clear that sustainable development is closely related to capital allocation not only between economic agents but also between generations and these are the main activities of financial markets. As a practical example, a bank as a lender can prioritize which projects are chosen, whether picking a debtor that is environmentally friendly or not or energy efficient or not. Banks as lenders also have a considerable influence over the management of companies, so that they can also help or even direct its debtor so that it is more aware of reducing the environmental impact of its activities. Banks can also develop financial products to encourage sustainable development. As an example, “green mortgages” have been implemented in several countries. The programs provide reductions in interest for home loans that meet environmental criteria.
With its power and control over capital allocation in the Indonesian economy, the banking sector surely can have a major impact and accelerate sustainable development in Indonesia. However, the banking sector cannot move by itself. Clear rules and guidelines from government should be issued to create clarity for the banking industry in applying the principles of sustainable finance. Simple, clear and unequivocal incentives and disincentives for economic actors should also be established to enable all stakeholders to move in harmony to achieve these principles. In terms of resources, the competencies and capacities of both the banking industry and environmental regulators as to the principles of sustainable finance should be improved.
Finally, there should be synergy among banking institutions, environmental regulators and local governments in implementing the principles of sustainable finance. All stakeholders should understand that the principles of sustainable finance are in the national interest, not just the interest of certain institutions or regions.
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