Indonesia’s Banking Sector Faces Compliance Challenges Amidst Rising Climate Risks

Regulatory Pressure Mounts

The Indonesian banking sector is facing increasing regulatory pressure to address its exposure to carbon-intensive sectors, following a recent announcement by the Financial Services Authority (OJK) that all banks must factor climate risks into their lending decisions by 2026.

Industry Experts Predict Shift in Reporting and Management of Climate Risks

Industry experts predict a significant shift in how financial institutions report and manage climate-related risks over the next two-to-five years. “We’re looking at a significant shift within the next two-to-five years in how financial risks associated with climate change are reported and managed,” says Yuliana Sudjonno, sustainability leader at PwC Indonesia.

OJK Guidelines for Climate Risk Stress Testing

The OJK has published guidelines for banks’ climate risk stress testing, which is part of the initial phase of stress testing requirements for banks that participate in its climate task force. Big banks such as Bank Mandiri, Bank Rakyat Indonesia, Bank Central Asia, and Bank Negara Indonesia have been expanding their reporting on Scope 3 emissions from their financing.

Banks Take Steps to Reduce Emissions

HSBC Indonesia, a member of the OJK’s climate task force, is working with clients to help them reduce their emissions and scale up low-carbon solutions. “We definitely see a growing trend of companies implementing sustainability into their operations, including banks in Indonesia,” says Francois de Maricourt, president director at HSBC Indonesia.

Challenges in Financing Climate Needs

However, financing a significant portion of the country’s climate needs remains a challenge. According to OJK’s 2023 report on Indonesia’s financial development, the highest growth in investment loans went to the mining sector, which increased by 43% in 2022. Indonesia is the world’s largest nickel producer and third-largest coal producer.

Banks’ Approach to Carbon-Intensive Sectors

As national efforts intensify to reduce carbon emissions, banks have started to be more prudent on carbon-intensive sectors, requiring sustainable palm oil certificates for crude palm oil credit and only lending to environmentally responsible miners. “Some of the banks are committed to stopping new loans for carbon-intensive sectors such as coal,” says Luthfyana Kartika Larasati, Indonesia manager at Climate Policy Initiative. “But there are also cases where they continue to finance these sectors due to business models and mandates from shareholders.”

Data Challenges in Climate Risk Management

According to data from CPI, between 2015 and 2021 Indonesia’s financial sector committed $41.7bn to climate change, which only constituted 15% of the country’s climate finance needs.

Accurate emissions data is crucial for productive climate stress tests and disclosures, yet information gathering in Indonesia remains challenging. “It’s not standard practice for all banks in the industry in Indonesia to carry out stress testing yet,” says Melissa Cheok, associate director of ESG research at Sustainable Fitch. “Many institutions lack the necessary data, expertise and resources to assess existing risks within their current portfolios, let alone quantify potential future risks.”

OJK’s Green Taxonomy

The OJK’s green taxonomy, published in 2022, serves as a basis for banks to understand the composition of their loan portfolio and analyse their climate strategy.