Indonesia Launches Green Taxonomy, Sets Policy Priorities

Taxonomy aims to  enable the financial sector to classify green activities, facilitate monitoring of credit and investment flows, and prevent greenwashing.

Indonesian president Joko Widodo announced the launch of the country’s green taxonomy at the country’s 2022 Financial Services Industry Annual Meeting on 20 January.

The taxonomy, compiled with eight ministries led by the Financial Services Authority (OJK), contains a list of classifications of economic activities that support environmental protection efforts and management efforts, as well as climate change mitigation and adaptation.

In compiling the taxonomy, 2,733 economic sector and sub-sector classifications were reviewed. Of the 919 classifications that were mapped to sub-sectors, groups and business activities, 904 will be categorised as green if certain prerequisites are met, while another 15 can be directly included in green category.

For classification purposes, the criteria within the taxonomy are divided into three categories, namely:

  • green (do no significant harm, apply minimum safeguard, provide positive impact to the environment, align with the environmental objective of the taxonomy)
  • yellow (do no significant harm)
  • red (harmful activities)

According to OJK, the taxonomy will enable the financial sector to classify green activities within their portfolios, facilitate monitoring of credit and investment flows into the green sector, and prevent greenwashing. It will also enhance the quality of disclosure in sustainability reports, improve the environment by enabling more sustainable economic and investment activities, and encourage innovation in developing green products, projects and initiatives.

The taxonomy will also serve as a guideline for the formulation of policy incentives (and disincentives) to promote the development of a green economy. One such policy incentive will be the implementation of lower risk weights for the financing of battery-based vehicles.

Economy recovery and policy priorities

At the meeting, Widodo encouraged the financial services sector to continue to support the national economic recovery by financing the MSME (micro, small and medium enterprises) sector. He said the target is for MSMEs to be getting at least 30% of their credit from the banking industry by 2024, compared to 20% currently. “To achieve that, breakthrough strategies and serious, consistent and sustainable actions are needed.”

OJK chairman Wimboh Santoso said he was optimistic on the performance of the financial services industry, projecting that banking credit will grow around 7.5%.

OJK has set five policy priorities for the year, including to promote lending to the commodity and property sectors and prepare the financial sector for policy normalisation in other countries. Santoso also said OJK pans to restructure the mutual fund industry to strengthen governance.

A sustainable financing scheme will be developed for the financial services industry to support the development of a new green economy. This will include the establishment of a carbon market, a regulatory framework for which is under development by OJK in collaboration with the Indonesia Stock Exchange and other market infrastructure institutions.

Fundraising in the capital market is expected to increase by between IDR 125 trillion and 175 trillion (US$8.7 billion and 12.2 billion), with MSME financing being further developed through securities crowdfunding. In 2021, capital market fundraising increased to IDR 363.3 trillion, up 206% from 2020.

Indonesia’s market reached a market cap of IDR 8.2 quadrillion as of end-2021, the second highest in ASEAN after Thailand. Investors in the capital market also rose to 7.5 million by end-2021, which was up 93% since the previous year. More than 80% of the new investors were millennials.

Santoso said OJK also plans to strengthen its policies on digital transformation in the financial sector, increase public access to financial products and services, improve financial literacy and consumer protection, and enhance capital and market conduct rules for online lenders.

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