As Indonesia’s Financial Service Authority (OJK) will release a regulation on sustainable finance, a monitoring framework to evaluate the effectiveness of the regulation is needed. USAID ICED II supported OJK in developing a good performance indicator measurement for financial institution’s green portfolio. The effort to establish a good indicator for green portfolio of financial institution will be useful not only to look at the effectiveness of sustainable finance policy, but also for another purpose such as to design incentive mechanism to promote green lending.
In order to serve this purpose, USAID ICED II started a research on green lending baseline. USAID ICED II developed a report on green lending baseline survey titled “Defining Green Lending Criteria for Developing Baseline Survey on Green Portfolio of Banks in Indonesia: A Preliminary Literature Review”.
This academic paper comprises of three sections: 1) a brief examination of green economy and green industry definition; 2) the concept of green lending and 3) the methodology used in developing green lending criteria that is expected to be compatible to Indonesian banking market situation. Transitioning into green economies will require fiscal policies and strategies in creating a green industrial system. Such system may involve two methods: “greening” the existing industries or creating “new green industries.” However it is believed that the first method is a core determinant of economic competitiveness and sustainable growth.
A comprehensive desk study on comparison of established sustainable banking frameworks in other emerging countries was completed. Banks that have already developed a collection of criteria in implementing green lending, green investments, green bonds and green loans were also identified and analyzed along with the definition of each sector.
The methodology proposed for Indonesia is: 1) identifying sectors that support green economies, 2) sectors causing environmental impact, and finally, 3) benchmarking green project list and criteria from other financial institutions in other countries that already implemented the green financing. The review outcome were 10 Green Project Categories, each with a set of project examples.
To build a database of Indonesia’s green lending baseline and methodology for reporting and monitoring green lending, a survey targeting respondents from conventional, sharia, and development banks will be conducted. The questionnaire will focus on green lending and the implementation of Environmental, Social and Governance (ESG) in banks. ICED II also performed an initial environmental and social risk mapping for each economic sector. By comparing against the number of banks’ portfolio based on the mapped risks from each sector, will serve as a green lending baseline.