The Financial Services Authority (OJK) has released a report on the implementation of the Indonesian Green Taxonomy for 2022, which reveals that financing for green activities is still low. Of the total financing of IDR 1.521 trillion in June 2022, most of it was allocated to MSMEs rather than green activities. The results of Climate Policy Initiative (CPI) research show that between 2019-2021, around 34% of bank ESG portfolios in Indonesia amounting to USD 3,6 trillion were directed at social financing or MSMEs, with more than 70% for MSMEs and less than 30% for activities green. Green financing by private banks reaches 41% of their total ESG portfolio, while state-owned banks only account for 23%.
Disclosure of ESG information is important for banks because it provides a number of benefits, including reducing risk in portfolios, improving reputation, and opening up opportunities for innovation and growth. However, ESG disclosure by public companies and banks in Indonesia is still minimal. Several banks such as Bank Mandiri, BRI, CIMB Niaga, Maybank, and BJB have revealed a list of exceptions for not financing business activities that violate ESG. However, there are significant challenges to disclosure of ESG information and risks, including regulations that need to be strengthened, a short-term perspective, limited capacity, high costs, and a lack of ESG data and metrics.
The double materiality approach in disclosing ESG information is considered important because it considers the financial and non-financial impacts of the company's activities. A strong complaints mechanism is also needed to handle public complaints regarding the impact of bank financing. Banks in Indonesia lag behind other Asian banks in terms of complaint mechanisms. These challenges include insufficiently detailed regulations, lack of top management involvement, limited capacity, high costs, and lack of reliable data.
Policy recommendations to improve this situation include revising the Indonesian Green Taxonomy document and POJK Technical Guidelines 51/2017, creating technical regulations derived from the P2SK Law, strengthening the monitoring and complaints system, and establishing a stakeholder forum on sustainable finance. Banks are also advised to make ESG reporting based on clear targets with measurable evidence and data.
With better policy implementation and more transparent disclosure of ESG information, it is hoped that financing for green activities in Indonesia can increase. This will help meet climate financing needs and reduce the financing gap which currently remains significant. Through this approach, banks in Indonesia can play a greater role in supporting environmental and social sustainability in the future.
Read the full Policy Brief volume 44 entitled "Disclosure of Environmental, Social and Bank Governance Aspects: Transparency on Sustainability" below:
