Fostering Green Finance in Indonesia

Project description

Country Working Group of Deutsches Institut für Entwicklungspolitik / German Development Institute (DIE), 2012/2013

Planetary boundaries and a scarcity of natural resources will require a significant boost of investment into clean and renewable energy and energy efficiency in developing, emerging and advanced countries alike. Governments have to provide the regulatory framework that will increase incentives for a more efficient use of resources and increased investment in sustainable and energy-efficient ventures. In this context, the financial sector will have to play a key role in providing “green finance” for sustainable development. The concept of green finance, although still in its infancy, has attracted considerable interest in recent years, not least in the development community. Green finance comprises all forms of investment or lending that take into account environmental impact and enhance environmental sustainability. A key element of green finance is sustainable investment and banking, where investment and lending decisions are taken on the basis of environmental screening and risk assessment to meet environmental sustainability standards.

Against this backdrop, the proposed Country Working Group investigated the challenges for developing and emerging countries in enhancing green financing for sustainable and energy-efficient investment, using Indonesia as a case study. It also analysed the role that development cooperation can play in supporting developing and emerging countries in designing a regulatory framework geared at increasing green investment.

Indonesia, a lower middle income country with a per capita income of $2,500 in 2010 and the world’s fourth most populous country with almost 240 million people, was an interesting case study. The country faces vast financing needs for green investment in clean and renewable energy, wastewater treatment and sanitation, and transport and infrastructure, both in rural areas and in urban areas such as Greater Jakarta with about 33 million people. The Indonesian government has recognised the need for supporting green growth and made strides at promoting green finance: in 2011, Bank Indonesia, the country’s central bank, and the Environment Ministry prepared an operational guideline for banks to assess environmental sustainability in their loan decisions.

There were several potential cooperation partners for the proposed research project. German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) has good contacts with the Bank Indonesia colleagues working on green banking as well as with various Indonesian think tanks and universities. Regarding German development cooperation, GIZ, KfW and DEG are actively promoting green finance and sustainable banking and investment, as are international organisations such as the World Bank and the Asian Development Bank. There is also interest in this topic from the private financial sector. The prospective LAG corresponded well with Department V’s strategy of analysing sources for green investment in developing and emerging countries beyond ODA.