Authors: Felicia Grace and Filda Citra Yusgiantoro*
With the signing of the Paris Agreement in 2016, Indonesia is committed to reducing its 29% carbon emission by 2050. The other duty is to meet its ambitious target of 23% new renewable energy by 2025. However, the most significant contributor to carbon emission in Indonesia is the energy sector. Hence, the development of green energy will play a crucial role in mitigating climate change and fulfilling the national energy mix target.
To meet those targets, a massive amount of funding and investment is needed. It is estimated that the funding needs for mitigation and adaptation of climate change activities is USD247 billion. Climate change funding in Indonesia is mainly dominated by domestic financing from the government budget. But the budget itself, of course, is not limited to green energy development alone. Another statement explains that green energy development is lacking due to the domination of subsidy for fossil energy.
Public funding such as corporate green bonds issued by energy sector state-owned enterprises can be an alternative funding to accelerate green energy projects. However, the issuer’s credibility in providing reports regarding the fund allocation and environmental impact is crucial to gain investors’ credence and to maintain green bonds rating. If the issuer can not bear those things, investors will be reluctant to buy the bond and the issuer can lose its reputation.
Why should corporate green bonds?
Green bond is a debt finance instrument that has a similar concept as a conventional bond. But green bonds are explicitly used for funding climate-related or environmental friendly projects. Besides having a credit rating, green bonds also receive a green rating that identifies how green the issuer is.
Since the first issuance in 2007, green bonds have shown tremendous growth. In 2019, the global market’s total bond was USD 258.9 billion in 2019 or an increase of $87.7 billion from 2018 and the issuance is dominated by corporates.
Source: PYC Data Center
This indicates that green bonds are getting more spotlight. Investors today think about not only risk and return, but also impacts of environmental, social and governance (ESG). The fact that bonds are low-risk makes them more preferred than other financial instruments. Moreover, by investing in green bonds, investors can participate in climate reduction action and make a real impact on the earth’s sustainability. These opportunities can make green bonds become a new trend of global investment.
Despite the domination of the corporate in the green bond global market, Indonesia corporate green bond was firstly issued in 2018 by Indonesia’s state-owned financing enterprise, PT Sarana Multi Infrastruktur.Also in the same year, Indonesia has become a pioneer in issuing the world’s first sovereign green islamic bond (green sukuk). Even in 2020, green sukuk received a great response from global investors by oversubscribing than targeted.
However, now, Indonesia prioritized most of its expenditure for COVID-19 vaccination and for economic recovery. In other words, government subsidies are simply not sufficient to finance the green infrastructure project. Indeed, Indonesia still has much homework to be done aside from climate change. Indonesia should put its commitment to climate change as equal to COVID-19. Instead of postponing climate-related infrastructures, it can be substituted by encouraging alternative financing instruments that are issued by particular sectors that harm the environment the most, the energy sector.
Momentum for state-owned enterprises to step up
The great global response toward Indonesian green sukuk issuance, indicates that the uncertainty caused by COVID-19 pandemic has shifted investor risk appetite. Investors tend to lower their risk tolerance and look for more ”safe” investment instruments that have a lower-risk yet reasonable rate of return. Therefore, this is the right time for state-owned enterprises working in the energy sector such as Indonesian State Electricity Company (PLN) and Pertamina to step into the green bond market. Both PLN and Pertamina have projects that work on green energy development. PLN actually has launched a statement of intent of a sustainable financing framework that contains PLN’s plans in issuing environmentally friendly investment instruments.
However, the most important thing to maintain is reputation, as it will impact green investors’ decisions. PLN or Pertamina need to uphold transparency and consistency in reporting how and where the funds proceeded. Funds obtained from issuing green bonds must not be used for fossil projects. In addition, the methodology evaluation should be elaborated clearly and the results must show the effectiveness of the emission reduction from projects that are implemented. All of these matters must be reported to investors in detail, clear and transparent through periodic reports. Along with the government, issuers have also continuously promoted climate change and green energy to increase public awareness. Because if the society can not take care of the environment, in the end, it will indirectly influence Indonesia’s green rating.
If the issuers could put their commitment and consistency fully to the requirement, green bonds could play an important role in reducing carbon emission and promoting a low-carbon economy in Indonesia.
*Filda Citra Yusgiantoro is the chairperson of the Purnomo Yusgiantoro Center and an economic lecturer at Prasetiya Mulya University. She holds a Doctor of Philosophy (Ph.D.) degree from Monash University.