Inclusive and Sustainable Financing: Risks and Opportunities for the Banking

Sector

IMANSYAH Deputy Commissioner for Internasional and Research

Prepared for

The Asia-Pacific Conference on Financing for Inclusive and Sustainable Development

10 – 12 December, 2019, Dhaka, Bangladesh

#1 Current Developments

CASCADING SUSTAINABLE FINANCE (SF) ROADMAP PHASE 1 (2015-2019)

Strengthening ESG risk management in FIs that contribute to Financial Stability

Creating contributive and inclusive FIs that support sustainable development and

climate financing

Making Environmental & Social Risk and Governance (ESG) a part of FIs’ risk

management

Developing sustainable financial products and services, including capital markets

Sustainable Finance Guidelines: Banks/Capital Market/Insurance

(2015-2019)

OJK Regulation on Sustainable Finance and OJK Regulation on Green Bonds

Baseline/metadata Survey for category of SF (2017-2019)

Developing market for sustainable products and its supporting industries

Developing domestic and regional (ASEAN)

markets for sustainable products

Government Supports for conducive regulations and agreements

Developing industrial centers supporting

sustainable products

3

Financial market deepening (through

development of domestic carbon

markets and other SF market

instruments)

Incentives for FIs and real sector (2015-2019 and beyond )

Capacity building and awareness programs; Sustainable Banking

(Pilot Project in 2018)

ESG Guidelines for FIs & Supervisors

Reporting system and disclosures

The Next Roadmap 2020 - 2024

Capacity Building and institutional

enhancement

National and regional task force on Sustainable Finance

Research and Development

Green Lending Models for economic priority sectors

Enhancing access of Indonesian FIs to global public funds

Designing incentive schemes

Trainings, Workshops and Seminars on SF

ESG Risk Management

Policy

Designing Sustainable Finance

Portfolios

Developing green finance products, green bonds, green index

Campaigning programs to potential investors

2015 2016 2017 2018 2019 2020-2024

SUSTAINABLE FINANCE ROADMAP PHASE 1 SUSTAINABLE FINANCE ROADMAP PHASE 2

Regulation on Sustainable Finance issued but need to set the

target on SF portfolios

FIs need incentives from OJK

• Need for Reference on SF loans/financing/investment

• Need for review on Environmental Training Analysis

modules (to create training standards)

FIs need OJK mentorship

Need to increase FI’s capacity on SF

• Need a “tagline” for SF to promote awareness (for internal

and external parties)

• Need a Coordination Forum/Special Task Force dedicated to further initiative on SF

• FIs expect OJK to be pioneer on SF implementation in Indonesia

4

OJK’S ENDEAVOUR TOWARDS SUSTAINABLE FINANCE

• 80% commercial

banks has submitted Sustainable Finance Action Plans.

• Increasing portfolio to finance sustainability projects: green buildings, ecotourism, renewable energy, organic farming, and sustainable infrastructures.

• Green insurance • Encourage leasing and finance

companies to provide financing for organic farmers, fishermen, and MSMEs.

• Set up microfinance institutions (with Islamic boarding schools all over Indonesia) that provide loans to environment-friendly businessess.

• Listed companies shall submit action plans on the implementation of sustainable finance

principles by end of 2019, followed by securities companies in 2 years.

• Regulations that support the issuance of

sustanability bonds and green sukuk.

ISFI is a forum for cooperation among financial institutions in the field of sustainable finance. The existence of ISFI is increasingly complementing the ecosystem of sustainable finance in Indonesia.

The program of sustainable finance on Banks, Capital Market and Non Bank Financial Institutions...

BANKS Capital Market NBFI

5

#2 Further Initiatives

SUSTAINABLE FINANCE STRATEGY

OJK is committed to establishing an effective regulatory environment to encourage the development of sustainable financing for the achievement of the SDGs...

Independent assessors qualified to assess green

projects.

Strategic national policies and leadership role.

Adequate level of literacy –on the part of investors, issuers and regulators—

on issues related to environment and the Sustainable Development Goals,

including green financing schemes.

Availability of experts in the sustainable development and

sustainable finance.

Clear global standards in green financing.

Scaled-up coordination efforts among Government agencies, domestic

and international organizations as well as private sector.

7

SUSTAINABLE FINANCE FURTHER ACTIONS

OJK outlines the need to disclose information on a “Target Achievement Strategy”

Risks management in Sustainable Finance incorporating economic, social and environmental aspects towards comprehensive risk management framework of FIs

Increasingly huge business

opportunity in SF

Description of economic, social and

environmental external situations

that may negatively affect FIs’ sustainability.

Mapping

Independent assessor that are qualified to assess potential green projects.

Availability of experts in the sustainable development and sustainable finance.

Strategic national policies and

leadership role.

Clear global standards in green

financing

Achievements

Adequate level of

literacy –related to

environment and SDGs, including green finance

schemes.

General preconditions What’s included in the

“Target Achievement Strategy”?

Continuing

Roadmap

(Phase 1)

+ • ESG Implementation with 8 Principles of Sustainable finance on FIs

• Capacity building and institutional enhancement

• Reporting system and disclosures

Roadmap Phase 2 (2020 – 2024)

8

8 Principles

1. Responsible investment;

2. Strategies and sustainable business practices;

3. Managing social and environmental risks;

4. Good governance principles;

5. Informative communication;

6. Inclusive;

7. Developing priority sectors; and

8. Coordination and collaboration.

MANAGING ESG RISK – A PRELIMINARY THOUGHT

OJK’s micro perspective for FIs especially bank to manage ESG risk

9

POJK No. 51/2017 concerning the

Implementation of Sustainable Finance

• Incorporate climate risk into bank

comprehensive risk management

framework

• Consider to treat climate risk not only as a reputational risk but it is a bank financial

risk (a new stand-alone risk?)

• draft an analytical report on the

measurement of climate-related risks and the transmission of such risks to the

banking system including current gaps,

challenges and limitations (e.g data availability)

• produce a range of practices report

summarising supervisory approaches to

climate-related financial risks

Points of concern (e.g BCBS Task Force on Climate Risks)

• Gaps remain on climate aspects only few banks tracking environmental benefits achieved.

• Set minimum thresholds of

SF portfolios for bank

• Set lower risk weight for SF portfolios

• Gov Guarantee for secured portions of SF portfolios

#Pillar 1

# Pillar 2

Options to incorporate measurement of SF

portfolios into bank capital

• Recognition of climate risk

• Altering the risk profile

assessment framework • Commensurate the min

capital with the “new” risk profile

Thank you ……

Sustainable Finance Website www.ojk.go.id/sustainable-finance

INDONESIA SUSTAINABLE FINANCE JOURNEY

2012

2013

2015

2014

2016

2017

2018

2019

OJK a founding member and joining SBN

OJK Developing Roadmap

OJK Issued SF Roadmap 2015-

2019

OJK 1. Awareness

Programs 2. Green lending

models

1. OJK SF Award 2. First Movers

Sustainable Banking

3. GoI ratified Paris Agreement on Climate Change

4. Bali Centre for Sustainable Finance (BCSF) established

1. OJK SF Regulation,

2. OJK Green Bond guidelines

3. GoI adopt SDGs initiative

1. 1st Green Bond/Sukuk issued by Government and Financial Institution

2. OJK SF guidelines for Banking

3. ISFI established 4. Introduction

blended finance scheme

1. 1st SF action plan by banks

2. OJK SF Monitoring

3. OJK Developing Roadmap Phase II 2020-2024

4. OJK SF research programs

5. Blended Finance 6. Sustainable

Finance Initiatives

2015-2019 implementation of OJK SF Roadmap

50 batches training program for 1000 SF officers

8 banks as the first movers

2 banks, 1 NBFIs issued green bonds about USD 669 mio

USD 2,4 bio blended finance commitment for SDGs

How could OJK close the funding gap, mobilize the capital and increase investors’ participations?

8 Principles

1. Responsible investment;

2. Strategies and sustainable business practices;

3. Managing social and environmental risks;

4. Good governance principles;

5. Informative communication;

6. Inclusive;

7. Developing priority sectors; and

8. Coordination and collaboration.

(POJK Number 51 /POJK.03/2017 Regarding the Implementation of Sustainable Finance for Financial Institutions, Issuers, and Public Companies)

FIs have to implement of sustainable finance principle (8) FIs have to deliver action plan to implementation SF All FIs have to deliver Sustainability Report Optimizing CSR Funds to Support Sustainable Finance Programs