The escalating issue of global warming could have a positive impact on Indonesia if it is linked to efforts to maintain the sustainability of its abundant natural resources, including oil and gas, minerals, non-minerals, and other metals. Furthermore, the government is currently striving to reduce the state budget's dependence on natural resource-based revenues through the development of various service industries, tourism, trade, and manufacturing.
In addition to the ratification of the global sustainable development goals (SDGs), the government's commitment to addressing the impacts of global warming is regulated nationally through the issuance of a Presidential Decree concerning the National Action Plan for Mitigating Greenhouse Gas Emission Reduction (RAN-GRK) in 2011 and the RAN for Climate Change Adaptation Action (API) in 2014. In the Presidential Decree, the target for reducing national GHG emissions is stated to be up to 26% with self-funding (APBN/APBD) and 41% in 2020, if assisted by international funding.
In 2016, the regulatory framework in the Presidential Decree was revised in the Paris Agreement ratification mechanism which resulted in Indonesia's Nationally Determined Contributions (NDC) document, by increasing the emission reduction target to 29% and 41% in 2030. And every year the government then officially submits a performance report on the realization of GHG emission reduction to the official UN agency within the UNFCCC framework.
Compared to the previous administration, there are slight differences in the implementation strategy. While in the previous period, the vision to address global warming was addressed through an independent environmental function (LH) approach, in the current period, the strategy developed is also aligned with the development vision and mission as outlined in Nawa Cita (9 priority agendas). Thus, the approach taken is not solely based on environmental issues, but is strengthened through an economic infrastructure approach, such as how to integrate climate change adaptation and mitigation activities with infrastructure themes and several other issues such as gender, poverty, and economic growth. With this approach, the government believes that development can proceed more sustainably.
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To meet transparency and public accountability, the government is also striving to ensure strong governance . It should be noted that deforestation and land-use change are currently major contributors to Indonesia's emissions levels. Therefore, the government has prepared a set of early prevention tools through mandatory Environmental Impact Analysis (AMDAL) and Strategic Environmental Assessment (KLHS) documents at regional levels to ensure that resulting externalities can be addressed.
On the other hand, while still prioritizing conservation efforts in protected forest areas, peatlands, mangrove forests, and several other areas with high biodiversity value, the government has also issued a ban on primary forest clearing activities and a ban on converting peatlands.
Unfortunately, funding issues remain a perennial problem. Many parties, both at the central and regional levels, consistently feel that commitments are hampered by funding needs, which often conflict and are not well-targeted. Consequently, some believe the government's commitment remains limited to documents, not reaching implementation on the ground. This is despite the fact that all steps and policies have been aligned, from efforts to incorporate sustainability issues and support for environmental and natural resource conservation into the Government Work Plan (RKP), to strengthening government spending allocations, and harmonizing the allocation of Transfers to Regions.
Various innovative funding schemes were also explored through the issuance of Government Regulation (PP) Number 46 of 2017 concerning Environmental Economic Instruments (IELH). This regulation covers all aspects of green banking, green sukuk, green bonds, green tax, green insurance, ecological fiscal transfer (EFT), payment ecosystem services (PES), and environmental trust funds. The PP also details the government's on-call funds as environmental recovery guarantees.
From the aspect of accountability and transparency of environmental budget allocations, since 2015 the government has implemented a budget tracking mechanism ( budget tagging ) at the national level. With budget tagging , the realization of government spending on the environment can be traced to whether it is directly related to or merely supporting efforts to reduce GHG emissions. The government is also forced to start considering how to formulate budget planning more simply and intelligently in aligning inputs, programs, activities, outputs , and outcomes . Thus, going forward, budget planning patterns in the government's environmental sector truly reflect aspects of performance-based budgeting .
Since 2015, budget tagging has been mandatory for climate change mitigation in six designated ministries/agencies (KL): the Ministry of Environment and Forestry, the Ministry of Agriculture, the Ministry of Energy and Mineral Resources, the Ministry of Industry, the Ministry of Public Works and Public Housing, and the Ministry of Transportation. In 2018, the budget tagging requirement was expanded to include climate change adaptation, which encompasses the authority of 17 other KLs. Going forward, this obligation will be further expanded to cover other budget themes with broader shared authority, such as gender, infrastructure, poverty, and South-South cooperation.
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Following the successful implementation of budget reforms through the budget tagging mechanism, the government felt a relatively high level of confidence in officially issuing the world's first Sovereign Green Sukuk, with a transaction value of USD 1,250 million for the 5-year tenor and USD 1,750 million for the 10-year tenor. This green sukuk , better known as government green sukuk, was jointly managed by Abu Dhabi Islamic Bank, CIMB Niaga, Citibank, Dubai Islamic Bank, and HSBC, all of whom have international reputations in the green sharia industry.
Why is it called the world's first issuer ? Because no other country in the world has issued a government green sukuk before. The governments of France, Fiji, and Poland have issued green debt, but in the form of conventional sukuk ( green bonds ).
Before issuing green sukuk, the government first developed a green framework . Indonesia's green framework received a review from the Oslo, Norway-based Center for Climate International Research (CICERO). In 2017, CICERO was listed as the best external reviewer for the country's Green Bond and Sukuk issuances. Overall, CICERO gave Indonesia's green framework a medium green rating . This medium green rating is defined as recognition of the government's strong commitment to the future, despite its current suboptimal activities.
Indonesia's green sukuk is based on the government's commitment to addressing the impacts of global climate change. This commitment began in 2009, when President Susilo Bambang Yudhoyono (SBY) pledged to reduce greenhouse gas (GHG) emissions by 26% by 2020 with internal funding and 41% with international assistance. This commitment was then formalized in Presidential Regulation (Perpres) No. 61 of 2011 on the National Action Plan for Reducing GHG Emissions (RAN-GRK), which was revised by the Jokowi administration, raising the emission reduction targets to 29% and 41% by 2030.
The Presidential Regulation on the National Action Plan for Climate Change (RAN-GRK) then became the basis for regulating climate change mitigation actions in Indonesia. Meanwhile, to regulate climate change adaptation actions, the government issued provisions in the form of the National Adaptation Action Plan (RAN-API) and the Indonesian Biodiversity Action Plan (IBSAP) for the biodiversity sector . The government does not specifically regulate the RAN-API and IBSAP, unlike the RAN-GRK, but streams them into the National Medium-Term Development Plan (RPJM).
These various regulations then serve as references for green eligible sectors , which will be funded by the government's green sukuk. Approximately nine green sectors will receive allocations: renewable energy, energy efficiency, disaster risk reduction, sustainable transport, waste-to-energy and waste-to-management, sustainable management of natural resources, green tourism, green buildings , and sustainable agriculture .
The chosen sukuk structure is wakala , which defines ownership of projects/activities managed by investment managers. In terms of demand allocation, 32% is traded in Islamic countries, 25% in Asia, 15% in Europe, 18% in the Americas, and 10% is allocated domestically. Interestingly, in terms of allocation type, the majority of purchases are still made by existing customers such as asset managers, pension funds , and private banks. However, this government green sukuk also generated new demand from green consumers, representing 29%.
This is precisely the phenomenon the bond market industry must address going forward. The process of integrating green and sharia-compliant businesses has actually created a new market share with a growing captive market , as potential buyers include conventional, sharia-compliant, and green consumers . This is precisely the situation expected to emerge when the Indonesian government finally ventures to issue the world's first green sukuk.
It is hoped that various private companies and state-owned enterprises will soon follow the same process previously initiated by the government, at least beginning to enter the domestic market. This will allow for market deepening, and consequently, investment portfolios to expand. This is crucial considering that the Indonesian bond market itself is still relatively small and makes little significant contributions. According to the Financial Services Authority (OJK), as of March 29, 2018, the Indonesian bond market was only recorded at Rp2,566 trillion, a slight increase compared to the Rp2,487 trillion at the end of 2017, with the majority of the market being government bonds.
The Financial Services Authority (OJK) has also issued regulations regarding the Issuance and Requirements for Environmentally Friendly Debt Securities ( Green Bonds ), which serve as a reference for the private sector and state-owned enterprises. With all the preparations underway, the author believes that the government should also make the green sharia industry the spearhead of financing, particularly in addressing several key thematic issues on the national priority agenda. More broadly, green sharia businesses should also be leveraged to achieve the global sustainable development goals (SDGs) that are already on the horizon.
By: Joko Tri Haryanto
Researcher at the Fiscal Policy Agency, Ministry of Finance.
*) This article is a personal opinion and does not reflect the policies of the institution where the author works.
