It is time for BI to take the lead in developing the Green Swan Initiative to create a comprehensive policy ecosystem that supports sustainable finance.
By
A Prasetyantoko
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SALOMO TOBING
A Prasetyantoko
The bill on Financial Sector Development and Strengthening (P2SK) was passed into law on Thursday (15/12/2022). In the President's statement read out by the Finance Minister, the government expressed its appreciation to the House of Representatives for enacting the P2SK Law to spur financial sector reform for the nation’s future prosperity.
The Omnibus Law on the Financial Sector integrates 17 laws, including the Bank Indonesia Law, the Financial Services Authority (OJK) Law, the Deposit Insurance Corporation (LPS) Law, as well as the laws on commodity futures trading, on cooperatives, and on the social security system. Compared to the Job Creation Omnibus Law, the legislation on financial sector reform has not generated much debate. The public reaction has instead been on how to accelerate its implementation through derivative regulations.
Among the new substances in the P2SK Law are the chapters and articles on sustainable finance and on digital finance and cryptocurrency (assets). This shows that the P2SK Law is oriented towards the latest developments in the financial sector.
In terms of sustainable finance, the P2SK Law is an important milestone in green transformation, enabling the creation of a financial ecosystem that can deal with the climate issues plaguing the world.
The P2SK Law’s focus on sustainability issues can be seen in Article 1 regarding General Provisions No. 25, which states that sustainable finance, as an ecosystem, must have comprehensive support in the form of policies, regulations, norms, standards, products, transactions and financial services that harmonize the economy and environment, and finance sustainability activities and the transition to sustainable economic growth.
Green financial ecosystem
In particular, the implementation of sustainable finance is regulated in Chapter XVII, which consists of two parts. The first part regulates the implementation of sustainable finance for financial institutions, (bond or share) issuers and public companies. The second part regulates policies, support and coordination mechanisms for the development of sustainable finance.
Article 223, Paragraph (1), Point (d) states that, in the context of sustainable finance development, the Finance Ministry, the OJK, and Bank Indonesia (BI) must work together in preparing a sustainability taxonomy. Furthermore, provisions on the sustainability taxonomy must be regulated in a government regulation.
Article 224, Paragraph (5) mandates the Finance Ministry, the OJK and BI to form a “sustainable finance committee” to support the development of sustainable finance. The finance minister is to serve as the coordinator of the committee, to be regulated further in a government regulation.
BI is also to address sustainable finance issues through macroprudential policies. As Chapter VI, Article 35A stipulates: “Bank Indonesia is to establish and implement macroprudential policies in order to contribute to maintaining financial system stability through efforts to promote balanced, quality and sustainable intermediation; mitigate and manage systemic risk; and increase economic and financial inclusion, as well as sustainable finance.”
BI is authorized to regulate and develop inclusive financing and sustainable finance through macroprudential policy instruments. Meanwhile, the OJK is authorized to regulate carbon exchanges, as stipulated in Article 6, Paragraph (1), Point (b).
Publishing a legal framework on sustainable finance is very relevant to the domestic and global momentum. The Group of 20 Bali Summit agreed to a just energy transition partnership worth US$20 billion and the launch of an energy transition framework, or energy transition mechanism, for Indonesia.
The energy transition’s main focus is the accelerated retirement of coal-fired power plants, followed by a sustainable development strategy that also includes reforms in the transportation, industry, infrastructure, and other sectors while paying attention to the procedural aspects of a just transition. This is inseparable from the funding and investment strategies enabling the achievement of these objectives.
At the global level, several monetary and financial authorities established in 2017 a network of central banks and supervisory institutions in the financial sector to create a “green” financial system, known as the Network for Greening the Financial System (NGFS). To date, the NGFS’ members comprise 121 institutions (including the OJK) and 19 supervisory institutions.
As part of that commitment, the OJK has issued the 2022 green taxonomy 1.0 as part of the Sustainable Finance Road Map: Phase I (2015-2019) and Phase II (2021-2025). Various policies have also been issued, including OJK Regulation (POJK) No. 51/POJK.03/2017 on the Implementation of Sustainable Finance for Financial Institutions, Issuers and Public Companies.
It is time for BI to take the lead in developing the Green Swan Initiative to create a comprehensive policy ecosystem that supports sustainable finance.
This rule obliges all financial institutions to apply the principles of sustainable finance and to submit a public sustainability report. Apart from this is POJK No. 60/POJK.04/2017 concerning the Issuance of and Requirements for Green Bonds.
The existence of the P2SK Law should prompt financial institutions to accelerate the development of the concept of sustainable finance and its derivative policies. Within the macroprudential framework, the Bank of International Settlements published a paper in early 2020 titled “The green swan: Central banking and financial stability in the age of climate change”, which could be the primary reference.
It is time for BI to take the lead in developing the Green Swan Initiative to create a comprehensive policy ecosystem that supports sustainable finance.
A. PRASETYANTOKO, Rector, Atma Jaya Catholic University
(This article was translated by Hendarsyah Tarmizi.)
