OECD Bappenas Framework for industry’s net-zero transition: “Developing financing solutions in emerging and developing economies” Indonesia country stakeholder meeting, 6 December 2022, Jakarta, Indonesia

1. Financing for Decarbonization
Reflections on financing innovations and instruments
Francesco Strobbe, Lead Financial Sector Economist
World Bank, Jakarta

2. The Challenge
Transforming Indonesia’s economy to achieve net-zero by 2060 cannot be achieved without greening the private
sector. Significant more progress is required in expanding green finance at a pace commensurate with investment
needs.
However, progress has been lacking due to two binding constraints:
Lack of investment in green technology;
From a firm perspective marginal benefits
of adopting green technology are too
small
1
Lack of green finance;
Indonesia’s financial sector is too shallow,
and financing is too short-term to serve
green sectors.
2
These binding constraints can be addressed by:
(i) lowering the cost of acquiring green
technologies
(ii) mobilizing long-term, private green financing
and opening-up green markets.

3. Binding Constraint 1: Lack of investment in green technology
In the current operating environment, there is little incentive to invest in energy efficiency –from a firm perspective- as the
marginal benefits are too small
An example: an improvement in energy efficiency
requires significant new investment in better capital…
… but this investment would only slightly improve
operating profit
66.6
63.5 63.3
45.2
48.3 48.5
Baseline Simulation 1 Simulation 2 Baseline Simulation 1 Simulation 2
Total Production Cost (in Billion IDR) Profit (in Billion IDR)
31.5
116.1
250.5
Baseline Simulation 1 Simulation 2
Capital (in Billion IDR)
Low-efficient firms (i.e., below the median within their sector of activity) can improve their efficiency to two frontier target.
Target 1: Efficiency level of median firms within the three-digit ISIC (simulation 1).
Target 2: Efficiency level to the top 20 percent of the most efficient firm in the same three-digit ISIC (simulation 2)
Source: World Bank analysis using Indonesia Manufacturing Statistics 2015

4. Binding Constraint 2: Lack of green finance
However, green finance markets in Indonesia have not reached the scale required to meet the needs of
Indonesia’s climate goals. Over the past seven years, only US$ 13.2 billion of private, green finance has been
mobilized as the financial sector is:
Very shallow
Indonesia’s green bonds currently make up 1.5% of total
bonds issued (or 0.6 percent of GDP), much lower than
most G20 peers, with limited private sector involvement
(<30%).
Private sector credit to GDP in Indonesia stands at
only 38% (EAP average of 172%) with green finance
accounting for only 2% of total banking loans, due
to a variety of factors including lenders’ risk
aversion , lack of information, absence of clear,
consistent definitions on green activities and lack
of expertise.
PE/VC is deals in Indonesia reached a value of US$
6.37 billion in 2021 but green investments are a small
fraction of the total.
(i)
Biased towards short-term financing
(ii)
Banks typically provide loans that match their deposit
timeframe, which may not be suitable for investments
in green technologies that require longer-term
financing (5+ years)
Amongst ASEAN countries, Indonesia requires the largest volume of green finance, an estimated US$ 247 bn
(~21% of Indonesia’s 2021 GDP) by 2030 to meet its NDC of reducing greenhouse gas emissions by 29%.
Debt
Equity
Debt
Equity
PE/VC funds in Indonesia tend to have short
investment timeframes (3 years), while green
investments often require more patient capital.

5. Green finance markets could help close the climate funding gap, but they
remain small, especially in developing countries
5
Green / sustainable finance markets are growing globally However, these markets remain small in most countries
Sustainable debt annual issuance
Source: BloombergNEF, Bloomberg LP Source: Climate Bond Initiative
Green bond issuance in 2021

6. Green finance markets in Indonesia have not reached the scale required to
meet the needs of climate goals
0%
2%
4%
6%
8%
10%
12%
14%
2022
2021
2020
2008-2019
▪ According to the National Long Term Development
Plan (2005-2025), USD 186 billion (~18% of
Indonesia’s GDP) in private finance is needed by
2030 to support the country’s GHG emission
reduction target
▪ Green or sustainable finance markets (e.g., labelled
bonds) could provide an avenue to mobilize private
finance for climate action. However, these markets
remain small in Indonesia. Key challenges include:
▪ Lack of information around green projects
▪ Lack of consistent definition, reporting, disclosures and
data analytics on green activities
▪ Lack of expertise and internal resources for capacity
building
0%
20%
40%
60%
80%
100%
India Indonesia Brazil Turkey Mexico
Sustainability-linked bond
Sustainability bond
Social bond
Green instrument
Labelled bond issuance in Indonesia compared to G20 peers
Share of instrument types relative to total labelled bond issued

7. Some initial ideas
• Develop more detailed climate disclosure
requirements for banks, non-bank financial
institutions and listed companies.
• Integrate the green taxonomy into
regulation/guidance (e.g., for labelled
bonds) and disclosure/reporting
frameworks.
Disclosure & Reporting Green Finance
• Consider launching a Sovereign Green Fund
to mobilize other investors (primarily
international), underwriting the issuances
of green instruments.
• Accelerate municipal green bond issuance
by simplifying issuance requirement and
procedures and enhancing issuer capacity
to process and handle liabilities.
• Explore blended finance options to catalyze
private finance for climate action.

8. Thanks!