“For the first time since WWII, we sense a shift in which climate and the environment – not growth –will become the priority for governments and their citizens as shortages of food, clean water and air become existential questions,” Saxo Bank chief economist Steen Jakobsen said in a recent report as quoted by CNBC.
Jakobsen is not alone in identifying this emeging trend. Infact companies that invest in green technologies are the new darlings of the investment community, overtaking the current tech giants. Going forward, many governments are expected to increase investments and subsidies for for green industries, starting a new mega trend.
Indonesia too can leverage on this emerging trend. The exposure of global investors towardsESG (environmental, social and governance)has been on the rise. Over the past five years, almost one in five investors said they would allocate between 21 percent and 50 percent of their portfolio to ESG funds.
Given the size of its population and its extensive tropical rainforests, Indonesia is a particularly important participant in the battle against global warming.It has already committed in the 2015 Paris Agreement to reduce its greenhouse gas emissions by at least 29 percent below a ‘business-as-usual’ trajectory by 2030; several green sovereign and domestic bonds have been initiated and more are to come.
Is 2020 then a starting point for the crucial moment of the Sustainable Development Goals investment?
More Green Bonds
During the ASEAN Day event at the Luxembourg Chamber of Commerce in early March, the Indonesian Ambassador to Belgium, who is also concurrently Ambassador to Luxembourg and the European Union, Yuri O.Thamrin presented a video titled “Indonesia, the World’s Investment Paradise” (https://www.youtube.com/watch?v=vRxKMf9LrzU). He proposed cooperation for various green projects in Indonesia to more than 100 representatives from 60 Luxembourg companies.
“Luxembourg is one of the important countries of the European Union (EU) as a financial centre especially in green investments. We want to link up EU funding of US$80 billion in green bonds, including with Luxembourg, for various green projects in Indonesia,” he said.
Up to 2019, Indonesia had issued US$2 billion in sovereign green bonds: US$1.25 billion sovereign sukuk in 2018 and US$750 billion sovereign sukuk in 2019.
Dwi Irianti, Director of Sharia Financing, Ministry of Finance told the Indonesia Economic Forum that in the second and third quarter of 2020, the ministry plans to issue another sovereign green sukuk. She is also going to issue around Rp4 trillion worth of green saving sukuk for local individual investors in August and October. In addition, she will issue cash waqaf linked sukuk in May that that targets local individual investors as well as global institutional investors such as Islamic Development Bank (IsDB)
“IsDB have expressed their interest to becoming one of our investors since they can directly use their return to finance social program in line with the SDG goals. To reduce emission by 29%by 2030, it shouldn’t be only the government that has to act, but also civil society. They can contribute by investing in green sukuk investment products,” she said.
Indonesia offers huge opportunity in terms of green investing. For instance, there is still a US$26 billion funding gap for the period 2015-2019 in green bonds, as only US$55 billion in funds were raised from a total of US$81 billion needed.The challenge, according to Dwi, is to attract sufficient green investors as only 29 percent of the green bonds were purchased by green investors with the remainder being acquired by regular investors.
“There aren’t enough green investors as most investors are still chasing higher returns. I am expecting a coupon of around 3.3 percent against current level of 3.75 percent (referring their sovereign green sukuk). On the other hand, we need to improve our report transparency since investors still see our projects as only medium green. Some of our eligible green projects might include an element of deforestation.While the framework was good, it’s hard to ignore our track record with biodiversity conservation and habitat destruction,” she added.
Green Energy to Power Growth
Executive Director of the Institute for Essential Services Reform (IESR), Fabby Tumiwa told the Indonesia Economic Forum that the government is going to add around 9,052 MW of renewable energy in the national energy mix for the upcoming five years which will require at least US$20 billion in new investments.
“We will need at least US$20 billion to achieve our objective, or ideally around US$ 4 billion per year. This is surely offers a huge opportunity for investors to tap into. For instance, I heard that around 864 MW of electricity need for the new capital in Kalimantanwill come from renewable energy such as hydro power plants. Maybe investors from the Netherlands are interested?,” he said.
Unfortunately, Indonesia might lose some investors due to unpopular regulations. For example, the government’s MERM regulation that use basic production cost (BPP) instead of feed in tariff is turning off investors who are instead flocking to Vietnam which saw its solar installed capacity grow by 20-fold within a year because of the feed-in-tariff policy.
“At least for the next few years, to attract investors while the government prepares to implement the reverse auction scheme for utility-scale renewables projects, a clear plan and timetable has to be announced to ensure transparency and manage investor expectations. Otherwise, we might lose some investment,” noted Fabby.
Globally, over 200 multinational companies (at least 40 operate in Indonesia) are members of RE100 (global initiative of influential businesses committed to 100% renewable electricity and renewable energy) with combined revenues of up to US$4.5 trillion are now committed to utilizing 100% renewable energy across their global operational facilities by 2030. Some are even targeting 100% RE before 2025. Similar initiatives are on the rise for electric vehicle (EV100) and energy efficiency.
Regional Thematic Green Investment
Indonesia is also offering regional focused investment for ESG investors. Recently, the Coordinating Minister for Maritime and Investment Affairs Luhut Binsar Panjaitan launchedthe Green Investment Blueprint for Papua and West Papua.
“The green investment scheme is very promising because it is related to the economy and the welfare of society. We held meetingwith local governor and reached several agreements including the development of coffee, nutmeg, and cocoa plants which could be managed by middle-low farmers. It also emphasized on the role of the Governor of West Papua in developing the potential of this agricultural product and other products such as fishery,” Luhutsaid.
So far, government has introduced nine eligible green projects for ESG investors, including renewable energy; energy efficiency; resilience to climate change for highly vulnerable areas& sectors/disaster risk reduction; sustainable transport; waste-to-energy and waste management; sustainable management of natural resources;green tourism; green buildings; and sustainable agriculture.
According to the World Economic Forum, beyond the known infrastructure investment barriers, the challlenge will be to enable unprecendeted shift in long-term investment from conventional to green alternatives to avoid lock-in. Indonesia will need to move quickly if it wants to be a player in this emerging opportunity.