Indonesia’s Banks Under Pressure to Address Climate Risks in Lending Decisions

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Indonesian financial institutions are facing mounting regulatory pressure to integrate climate risks into their lending decisions as the country aims to reduce its carbon footprint. The Financial Services Authority (OJK) has ordered all banks to factor in climate-related risks by 2026, a move that is expected to significantly impact the way financial risks associated with climate change are reported and managed.

A Shift Towards Sustainability

“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,” said Yuliana Sudjonno, sustainability leader at PwC Indonesia. “Indonesia’s banks need to be more proactive in identifying and managing these risks.”

Banks Taking Action

Banks such as Bank Mandiri, Bank Rakyat Indonesia, Bank Central Asia, and Bank Negara Indonesia have already begun expanding their reporting on Scope 3 emissions from their financing.

• According to Jeffrosenberg Chen Lim, head of equity research at Maybank Securities Indonesia, banks are taking steps to reduce their carbon footprint.
• HSBC Indonesia is a member of the OJK’s climate task force and is working with clients to help them reduce their emissions and scale up low-carbon solutions.

Challenges Remain

Despite the growing trend towards sustainability, Indonesian banks are still financing carbon-intensive sectors such as coal mining. According to OJK’s 2023 report on Indonesia’s financial development, the highest growth in investment loans went to the mining sector.

• The government budget can only finance 34% of the total investment required to reach the country’s climate targets.
• Some banks are committed to stopping new loans for carbon-intensive sectors, but others continue to finance these sectors due to business models and mandates from shareholders.

Data Collection Challenges

The collection challenges of carbon-data remain a significant hurdle in having productive climate stress tests and disclosures. Many institutions lack the necessary data, expertise, and resources to assess existing risks within their current portfolios, let alone quantify potential future risks.

• The OJK’s green taxonomy serves as a basis for banks to understand the composition of their loan portfolio and can be used to analyze and further decide banks’ climate strategy.
• However, the lack of accurate emissions data remains a significant challenge for Indonesian financial institutions, highlighting the need for improved data collection and reporting practices.

Conclusion

Indonesia’s banks are under pressure to address climate risks in lending decisions. While some progress has been made, there is still much work to be done to ensure that financial institutions are better equipped to manage the risks posed by climate change.