#1B BANK INDONESIA BANK SENTRAL REPUBLIK INDONESIA BUSWORLD SEA CONFERENCE 2022 Central Bank Perspective: Promoting Green Finance for Sustainable Economic Development Dr Heru Rahadyan Macroprudential Policy Department Bank Indonesia 6 October 2022#2BE SURE TO WASH YOUR HANDS AND ALL WILL BE WELL COVID ور ** RECESSION CLIMATE CHANGE#3Economic Loss (Trillion IDR) 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 2019 Climate Change Poses Economic Risks and Opportunities In Indonesia, economic losses due to climate change have reached IDR 100 Trillion annually and are expected to escalate into 40% of GDP in 2048. The expected loss is higher compared to global average (18% GDP in 2050) as Indonesia highly relies on maritime and agriculture sectors No Adaptation -5 < 2,0°C Embargo on imports of non-green products 2020 2021 2022 2023 112,205 with Spontaneous 95,741 58,346 Economis Loss Reduction → 2024 Adaptation GDP Loss (%) 10 15 -20 -25 -30 with Climate Resilience Development 35 Year 2020 2030 2040 2,0°C 2,6°C 3,2°C 2050 Rise of Temperature Carbon tax on imported products 3 Penalty on ESG rating for non-sustainable investment Stranded assets & deteriorating asset value due to shifts in global preference Impact on the business and financial sector Source: Kebijakan Pembangunan Berketahanan Iklim, Bappenas (2021). Source: The economics of climate change, Swiss Re Institute (2021). However, rising concern toward climate change also brought upon investment opportunities. In Indonesia, green infrastructure and renewable energy sector potentially attract investment approx. US$792 billion. Viet Nam Cambodia 3% 16% Green Thailand 12% infrastructure Indonesia US$648 billion Singapore 2% Philippines 15% Malaysia Myanmar 9% Source: DBS (2017) 7% Indonesia 36% Infrastructure US$1.8 trillion Food, agriculture and land use US$0.4 trillion Renewable energy US$0.4 trillion Energy efficiency US$0.4 trillion Thailand 11% Viet Nam 16% Cambodia 1% Renewable energy Indonesia 36% Indonesia US$144 billion Singapore 4% Philippines 5% Myanmar 3% Lao PDR Malaysia 13% 11% Benefits of planned transition for Indonesia High Average GDP growth of 6.1-6.5% in 2021-2045 Creating additional "green jobs" of 1.8 mio jobs in 2030 Source: Green Economy Index, Bappenas (2022).#4The Urgency of Green Policy for Central Banks Achieving climate target is not a mandate for central bank. However, as climate related risks become more apparent and if it potentially hampers the achievement of monetary and financial system stability, central bank needs to take a action in managing the risks. Climate-related Risk Potential Impacts on Monetary and Financial Stability Central Bank Roles Physical Risk Including acute hazards (extreme weather events, heat waves, flood) and chronic hazards (rising sea levels, depleting biodiversity, etc) Transitional Risk Risk resulting from changing regulation, technology and preferences in attempt to adjust into low carbon economy • · · . Monetary Impact Increasing price volatility due to deteriorating agriculture productivity Exchange rate pressure due to changing investor preference and global financial flow Adjustment in monetary policy transmission due to changing valuation of risks Financial Stability Impact Higher credit risk on sectors vulnerable to physical risk Increasing financial risks from stranded assets and revaluation of market instruments • Limited access to finance for carbon- intensive industry Ensuring financial sector resiliency toward climate change impacts Supporting just, orderly, and affordable transition through encouraging sustainable finance and strengthening supporting infrastructure (e.g. data availability & disclosure, awareness, etc) Coordination and synergy with other authorities (domestic and international) in managing climate-related financial risk and harmonizing transition in financial sector#5Bank Indonesia's Green Initiatives 5 2010-2015 Initiating 2016-2020 Formulating a. NGFS a. Kick off green banking b. ASEAN TFSF policy b. BI-Ministry of Environment MoU on bank environmental conservation & management c. BI-IFC Green Banking Conference d. Green lending model e. Co-founder of Sustainable Banking Network f. Green office building c. Green policy research d. Green LTV regulation Road to Net Zero Emission e. Green international reserve portfolio f. Green capacity and awareness building for stakeholders 2021-2025 Developing a. G20 SFWG b. EMEAP IGSF c. Developing green macroprudential policy d. Developing green money market e. Developing green economic & financial inclusion 2026-2029 Strengthening a. Strengthening green macroprudential policy b. Strengthening green money market c. Strengthening green economic & financial inclusion 2030 Advancing NDC-aligned banking industry carbon reduction 2060 Maturing Banking industry neutral carbon#6Developing Green Macroprudential Policy Green Macroprudential Policy Green LTV Green inclusive financing ratio Carbon calculator Climate risk assessment Banks are the key for an orderly, just and affordable transition • • Banks are the largest carbon emitters nationally, as banks have to proportionally recognize the emission from their debtors as bank emissions 6 To reduce carbon emissions, the Bank must increase the portion of green financing so that it can become a catalyst for the transformation of the debtors to become greener. Due to the systemic nature and the long time horizon of the climate-related risk, macroprudential policy is considered the optimal approach to address the risk Banks reduce carbon emissions by increasing green financing Greening the Financing Green sectors assessment Other green policies Implemented Public expose Green data initiative On progress Green bank award Under discussion Bank The debtor's carbon emissions can be taken into account when approving the loans Banks have to proportionally recognize the debtor's carbon emissions as bank emissions (align to ISO 14064-1:2018) Greening the Debtors NDC#7Noting the sizable emission contribution of transportation sector, BI also encourage the adoption of EV through Green Down Payment Policy Transportation contributes to a sizable GHG emissions globally. 7 in Data Global greenhouse gas emissions by sector Our World Non-ferrous This is shown for the year 2016 - global greenhouse gas emissions were 49.4 billion tonnes CO₂eq. Reduction of emission from the use of vehicles can become one of key transition act. In the national GHG emission calculation, transportations are categorized in the energy sector In 2018 transportation contributed to 24% of total GHG emission of the energy sector GHG emission from transportation: • • 2018 = 8 Gigatonnes CO2e 2019 8,5 Gigatonnes CO2e = 2020 = 7,2 Gigatonnes CO2e In the Net Zero Emission Scenario by 2050, emission from transportation is planned to be reduced by 20% (or 5,7 Gigatonnes CO2e) in 2030. Agricultural soils 4.1% Rice cultivation 1.3% Crop burning 3.5% Deforestation Livestock & metals (0.7%) Chemical & Iron and steel (7.2%) manure (5.8%) Waste Agriculture, Forestry & Land Use 18.4% 2.2% Grassland Cropland 0.1% Landfills. 1.9% Wastewater (1.3%) 3.2% Chemicals 2.2% Industry 5.2% Cement 3% Energy in Agriculture & Fishing (1.7%) 5.8% Fugitive emissions from energy production 7.8% Unallocated fuel combustion petrochemical 3.6% Food & tobacco (1%) Paper & pulp (0.6%) Machinery (0.5%) Energy use in Industry (2 Energy 73.2% -- Other industry 10.6% Transpor Road Transport 11.9% Aviation 1.9% 1.7% Shipping Dinelin 4%) ne (0.3%) Licensed under CC-BY by the author Hannah Ritchie (2020). Energy Use in buildings (17.5%) Residential buildings (10.9%) Commercial (6.6%) Our WorldinData.org - Research and data to make progress against the world's largest problems. Source: Climate Watch, the World Resources Institute (2020). Source: our world in data. Source: adapted documents from KLHK.#8Macroprudential Policy to Promote Green Finance The green macroprudential policy can be divided into three groups: (i) Integrating sustainable considerations into existing macroprudential policy; (ii) Green monetary-macroprudential policy mix; and (iii) Innovation on green macroprudential policy • • Green LTV and Down Payment In 2018, Bank Indonesia requires banks to have a certain maximum LTV for property loans and a certain minimum down payment for vehicle loans In 2019, Bank Indonesia has loosened Loan to Value (LTV) for green housing loans and Down Payment for electric vehicle loans, 10% more relaxed than the non-green loans. In 2020, Bank Indonesia allows the LTV for green property loans up to 100% and the down payment for electric vehicle loans up to 0%. 田 00000 Green property and electric vehicles laons • Green Macroprudential Inclusive Financing Ratio (RPIM) In 2021, Bank Indonesia requires banks to maintain a certain inclusive financing ratio. In 2022, Bank Indonesia allows Banks to fulfil the inclusive financing ratio requirement by purchasing green bonds. 1. Direct financing and Supply Chain Financing RPIM 2. Financing through other financial/non- financial institutions (channeling & executing) 3. Purchase of inclusive financing securities 8#9Developing Carbon Calculator to Support Firms in Measuring Emission To align the global investments with the Paris Agreement, the global sustainability reporting standard will require firms to annually publish their carbon emission reduction target, strategy and developments. To support Indonesian firms in aligning to the carbon disclosure requirements, Bank Indonesia, the Coordinating Ministry of Maritime and Investment Affairs, and the Ministry of Environment and Forestry will launch a Carbon Calculator for firms % the Scope of Carbon Calculator in Development scope will be expanded gradually to allow businesses to orderly adjust their strategies Scope 1 Fossil-fuel electric generator Scope 2 Electricity Scope 3 Leased-Fossil-fuel business vehicle* Emission Reduction CO₂ Calculator v1.0 Land use & forestry Industrial process leaking purchased from PLN Leased-Fossil- fuel electric generator* Renewable energy Business travel Investment, securities, Electric vehicle loans others Carbon credit Fossil-fuel business vehicle By using the carbon calculator, firms can conduct a carbon emission self-measurement that will be assured by a public accountant 9#10A developed country is not a place where the poor have cars. It's where the rich use public transportation.#11BB BANK INDONESIA BANK SENTRAL REPUBLIK INDONESIA Thank You DKMP Macroprudential Policy Department Bank Indonesia