Indonesia Green Taxonomy, Towards Sustainable Finance Principles Conformity

Indonesia Green Taxonomy: Towards Sustainable Finance Principles Conformity

The imminent threat of climate change that is occuring nowadays has become much more critical than ever. With the rise of concern to mitigate the risks of the climate change, countries have started taking action to undertake the effort to implement more sustainable approaches, especially in the economic sector. Indonesia, as a country rich in its natural resources, must be adequately managed to support the economy in a sustainable manner. The financial services industry should play as a catalyst in accelerating the implementation of economic activities that positively impact the environment in building a more resilient economy.

In 2016, the government of the Republic of Indonesia ratified the Paris Agreement as its initial step to contribute toward the mitigation of the risks of climate change. Where the above Law is the guidance to mitigate climate change risks, the Indonesian Financial Services Authority (“OJK”) also supports the government in implementing the Paris Agreement through the development of sustainable finance. Furthermore, OJK has issued Sustainable Finance Roadmap Phase I (2015-2019) and Phase II (2021-2025), which primarily set out the goals and milestones in implementing sustainable finance for financial sectors in their respective period.

During the Phase I Roadmap period, OJK issued OJK Regulation No. 51/POJK.03/2017 on the Implementation of Sustainable Finance for Financial Institutions, Issuers, and Public companies (“POJK 51/2017”), which requires the financial services sector to implement the sustainable finance principles, to submit the sustainable finance action plan to OJK, and to publish its sustainability report. During the Phase II Roadmap, OJK sets a target to accelerate the implementation of sustainable finance by finalizing the Indonesia Green Taxonomy. In early 2022, the first edition of the Indonesia Green Taxonomy handbook (“Green Taxonomy Handbook”) was issued by OJK. This Green Taxonomy Handbook was prepared involving related ministries departments, the financial services industry (sustainable finance task force), academic/research and development institutions, international institutions, and non-governmental organizations.

The Green Taxonomy Handbook primarily sets forth the background and methodology of green taxonomy development as well as the illustration of green taxonomy classification to create conformity of understanding for market players and stakeholders. The Green Taxonomy Handbook provides the main framework in the green sector classification to support the transition for the financial services sector towards implementing sustainable finance. It is due to the consideration that creating an environmentally friendly industry shall not imply as a communication strategy without actually carrying out activities that positively impact environmental sustainability, often known as greenwashing.

As a follow-up to improve the implementation of POJK 51/2017, OJK deems it urgent to determine the standardization of the green definition and criteria, the periodic monitoring of the implementation of the credit/financing/investment allocation to the green sector, and the refinement of the reporting activities by the financial services industry. Those are expected to avoid any greenwashing practices by companies since these three interconnected aspects will strengthen the implementation and supervision of sustainable finance.

Under the Green Taxonomy Handbook, OJK defines green taxonomy as an economic activity classification that supports environmental protection and management efforts, as well as mitigation and adaptation to climate change (“Green Taxonomy”). The Green Taxonomy Handbook sets out the strategic objectives of Green Taxonomy, the main principles, and the minimum target user of the Green Taxonomy.

Under the strategic objectives of the Green Taxonomy, the main agendas of the Green Taxonomy are as follows:

  1. developing a standard definition and green criteria from economic sector activities based on a science-based approach;
  2. encouraging innovations and investment in economic activities that positively impacting on the environment and the implementation of a science-based approach;
  3. encouraging the growth of the financial sector in funding and financing of green economic activities; and
  4. providing references for the financial services providers, investors, and business actors (both in the national and international level) to disclose the information related to the financing, funding, or investment for green economic activities.

Moreover, the Green Taxonomy Handbook sets out the methodology of Green Taxonomy development, and one of the methods is to create a benchmark for the Green Taxonomy. The benchmarking process is the effort to develop a comprehensive Green Taxonomy by analyzing the classification standards of economic activities both internationally and nationally. The development of Green Taxonomy will not only focus on the sectors that are classified as green but also provide room in determining the criteria and clarifications on thresholds used by relevant ministries.

As one of the main methods introduced in the Green Taxonomy Handbook, Indonesia Standard Industrial Classification (“KBLI”) and International Standard Industrial Classification (“ISIC”) are the national and international standards that could be relevant references to create a reliable green taxonomy. ISIC, as the internationally recognized standard, shall be a productive resource to support the development of KBLI.

In formulating the Green Taxonomy, there are five stages to determining a Green Taxonomy: defining the strategic goal and users, defining the environmental objectives, specifying the sectors and categories, assessing and determining the threshold, and preparing the reporting guidelines. After these stages, OJK will issue the sectoral reporting reference in the banking, capital market, and non-bank financial industry. As a result, there will be  levels of activities under KBLI that eventually result in determining economic activities as follows:

  1. green sector: a business activity that protects, restores, and improves the quality of environmental protection and management as well as climate change mitigation and adaptation, complies with the governance standards by the government, and applies best practices at both the national and international level;
  2. yellow sector: a business activity in which the determination of the benefits for environmental protection and management must be conducted through measurement and support of other best practices; and
  3. red sector: a business activity that does not meet the yellow and/or green criteria/threshold.

However, arguably the determination of the green sector solely through the activities under KBLI may not be accurate. Especially in the newest Online Single Submission Risk-Based Approach (OSS RBA), within one business activity, each of the business actors may have a different approach and standard in implementing its business. In result, such business activity may not be green oriented although classified as a green activity. Therefore, within the dynamic changes in the industry, the Green Taxonomy shall be able to adapt quickly and accurately to accommodate the needs of the standard classification of a green oriented sector. On the other hand, the government shall work alongside the business actors to determine a better ecosystem within the Green Taxonomy, to further that such determination may be used for a larger target user.

By: Aldi Prapanca

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