Integrating ESG Through Environmental Financing Programs in Indonesia


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Sudariyono, Deputy Minister for Capacity Building & Technical Infrastructure Development - Ministry of Environment - Indonesia

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  • For this reason, in the mid 1990s, the Ministry of Environment (KLH) started to apply mixed policies and instruments, which integrate between the mandatory approach, partnerships and market-based & economic instruments.
  • Up to now, MoE is foccused to internalised ESG to the banks. Why ?. Because most of investment financing is form Bank sector. We have 130 banks in Indonesia including 5 national banks, 67 private banks, 20 mix banks, 12 private banks and 26 regional banks. All the banks are stricly regulated by the central banks. However, There is no spesifc regulation on environmental isus. The only regulation from BI is the banks should use EIA before they lend to the end user and to calculate the asset quality they should use environmental rating to make sure that they only finance end user that has no problem with pollution. More over, only few banks that able to finance the environmental investment.
  • Why ?. Mainly because they do not have enough knowledge and experience on investing environmental investment. The reason is environmental investment is a cost center investement such as Wastewater Treatment or air pollution control, there is no revenue from this type of investment as a source to payback the fund. Moreover, energy alternatives and energy eficiency are in the developing stage, due to Central Bank Regulation at least the companies that can be financed by banks has been experienced for 2 years. Furthermore, Banks has difficulties to finance the MicroSmall Enterprises.
  • While most of Enterprises in Indonesia is Micro and Small Scale. According to statistical data provided by Badan Pusat Statistik (National Statistics Agency), in year 2003, the number of SMEs in Indonesia is 42 million, Micro enterprises alone reached the figure of 30 million. The mentioned figures also indicate that MSEs represent 99.4% of employment in Indonesia [2003], In regard to environmental aspect, with the considerable number, SMEs sector constitute as a very significant sector to be look out. Yet, most of MSEs face difficulties in managing their resources to acquire efficiency in their production, both through addressing the depletion of resources and inefficiency of equipment. Thus, encouraging those kinds of enterprises to implement cleaner production (reduce, reuse, recycle and recover) is one solution that needs to be promoted.
  • One of the solution is doing bussiness with them. To improve environmental quality in Indoensia, MoE provide some fund for environmental investments through banks. This program also aims to be more close with financial institution, MoE using business approach with the banks, starting 1993 we developed 4 environmental soft loan. Environmental soft loan is a financing scheme for environmental investment. By having bilateral agreement, MoE is able to have sources of fund to be financing to environmental investment to manage environment. Total fund available is IDR 600 Bilion or US$ 70 million that has been disbursed to about 700 enterprises. All t he fund disburse through banks.
  • One of the economic measures implemented since 1992 is a program of revolving environmental soft loans. The program is a joint effort between the government of Indonesia Bank Indonesia (the Central Bank) and channeling banks. This program so called JBIC PAE started with the offer of a soft loan from the government of Japan to assist industries primarily in managing their pollution loads (end-of-pipe). Following the success of the JBIC-PAE loan scheme, the government of Germany provided a grant to the government of Indonesia through KfW for the first Industrial Efficiency and Pollution Control soft loan program (IEPC1-KfW). In year 2005 the government of Indonesia received a soft loan from the government of Germany to continue this approach under IEPC-KfW phase 2.
  • This financial cooperation program promotes and speeds up the process of changing environmental management processes towards principles of pollution prevention particularly in SMEs. All environmental soft loan schemes are designed by using banks as a institution to disbursed the fund. Figure 1 describes the institutional arrangement. The above soft loan schemes still continue to run although the original donor funds for PAE and IEPC1 have already been fully exhausted. The funds that are now being managed by the banks are those revolving through repayments.
  • Institutionally, The Disbursement of the financial assistance to the MSEs follows this sequence: End Users sends a request to Implementing Financial Institution for Environmental Investment FI Analyzed Financial Aspect FI send a request for technical recommendation letter from MoE MoE analyzed technical aspect MoE send technical recommendation to Financial Institution Financial Institution disburse fund This arrangement make MoE is able to interact frequently with the banks, because with these scheme, need several preparation with the banks and have some times to discuss with the banks from director to the officer. From this cooperation, MoE start to able to have a link with the banks
  • Up tp now, there 12 participating bank that chanelling our fund.
  • To strengthen our cooperation we have capacityb uilding program that the fund is come form some part of interest rate, With this fund, he participant banks is able to build their capacity intensively.
  • Now, I would like to give you an example pf environmental investment for MSEs that have been funded by DNS Program. During the current period of energy crisis, one solution to energy crisis is to utilize wastes as alternative sources of energy.
  • The Bali micro biogas project is only one out of numbers projects funded through the financial scheme of Debt for Nature (DNS). Bali micro biogas project is a project for about 2000 small framers where this project helped to establish a Micro-Biogas-Installation to treat the waste from cows and pigs. cows and pigs dung become a second larger waste which polluted the rivers in Bali. With simple technique cow dung is transformed in bio-gas and this is powering a cooker. For is at least 2 cows, a so called Bio-Digester and a special cooker is required. The cost of one installation is approximately 500 USD. This project might be a small change to mitigate the climate change, but doing multiple time it could make a big difference. These changes start with the people and this small project is an excellent example what can be done to change. MoE will use these programs to replicate the projects whenever possible. This is really a win-win situation, win for environment and win for development, for all.
  • We finance one big pesantren in south sulawesi to treat waste oil to become biodiesel at capacity of 1 ton a day. The technology came from ITB for about 350 million.
  • Along with other instruments, incentive measures to promote environmental investment provide a triple win solution for all parties: win” for economic growth, ”win” for social, and certainly ”win” for the environment. The both non-monetary and monetary incentives measures generate multiplier effects for the industries communities, financial institutions (banks) and government. The role of all stakeholders, including banks in financing environmental investments greatly encourages more environmentally friendly enteprises. Financing through soft loan schemes has also provided an excellent learning opportunity for banks, in seeing that environmentally friendly measures do not only consitute a cost center , but that they can also increase earnings so that the risk of default in the MSME sector can be prevented. To sump up, the government’s policy initiative in developing and implementing incentive measures has significantly addressed obstacles for environmental investment faced by enterprises, especially MSMEs. Yet, for better achievement, the initiative on incentive measures needs to be enhanced and complement with other policies and instruments. Yet, the experiences told that when several industries finally show that financial benefits could be achieved through cleaner production measures (both in terms of reduced waste management costs and in terms of decreased need for raw materials and other inputs), banks gradually started to see that environmental investments can be interesting and financially rewarding
  • Integrating ESG Through Environmental Financing Programs in Indonesia

    1. 1. INTEGRATING ENVIRONMENTAL, SOCIAL ANDGOVERNANCE (ESG) THROUGH ENVIRONMENTAL FINANCING PROGRAM IN INDONESIA <ul><li>By : </li></ul><ul><li>Sudariyono </li></ul><ul><li>Deputy Minister for Capacity Bulding & Technical Infrastructure Development </li></ul><ul><li>Ministry of Environment </li></ul><ul><li>Republic of Indonesia </li></ul><ul><li>TBLI CONFERENCE ASIA 2010 </li></ul><ul><li>Tokyo, 27 May 2010 </li></ul>
    2. 2. Scope of Presentation <ul><li>Background </li></ul><ul><li>Environmental Financing Scheme in Indonesia </li></ul><ul><li>Strategy to enhance ESG </li></ul><ul><li>Closing remarks </li></ul>
    3. 3. Background Environment Policy <ul><li>Act 32/2009  Government shall develop economic instruments to enhance environment management in Indonesia; </li></ul><ul><li>Among instruments is economic related directly to financial Institution : </li></ul><ul><ul><li>Develop Green Banking </li></ul></ul><ul><ul><li>Develop Green Indonesian Stock Market Exchange </li></ul></ul>
    4. 4. Banks in Indonesia Total Bank 130 Banks
    5. 5. Why Bank can not finance Environmental Investment ? <ul><ul><li>Environmental investments is a cost center investment. </li></ul></ul><ul><ul><li>Environmental investment s is regarded as innovative product, </li></ul></ul><ul><ul><li>Most of Environmental Investment is a new products that are in developing stage </li></ul></ul><ul><ul><li>Most of companies is a new entities due to development of new technologies. </li></ul></ul>
    6. 6. PROPORTION OF MICRO, SMALL AND MEDIUM SCALE ENTERPRISES 0.5 % 1.5 % 98 % Medium Scale Small scale Micro scale 42,398 million Unit By numbers, MSMEs are potential polluters
    7. 7. <ul><li>APPROACH TO FINANCIAL Institutions </li></ul><ul><li>SOFT LOAN PROGRAMS : </li></ul><ul><li>Total Fund : IDR 632 Bilion or US $ 70 million </li></ul><ul><li>Sources of Fund : Soft Loan, Grant and Debt Swap for Nature from JBIC and KfW </li></ul><ul><li>Revolving Fund for 40 Years : end 2022 </li></ul><ul><li>End User : 729 Enterprises </li></ul>
    8. 8. <ul><li>Japan Bank International Cooperation-Pollution Abatement Equipment (JBIC-PAE) </li></ul><ul><li>Industrial Efficiency and Pollution Control-Kreditanstalt fur Wiederaufbau (IEPC-KfW) Tahap I </li></ul><ul><li>Industrial Efficiency and Pollution Control-Kreditanstalt fur Wiederaufbau (IEPC-KfW) Tahap II </li></ul><ul><li>Debt Swap for Nature from KfW </li></ul>Soft Loan Programs
    9. 9. SOFT LOAN PROGRAMS JBIC-PAE IEPC-KfW phase I IEPC-KfW phase II SOURCE Soft Loan From JBIC Grant from KfW Soft Loan from KfW TARGET All size of enterprises SMEs SMEs Handling Banks 5 National Banks 4 Regional Banks (BPD) 1 National Bank 4 Regional Banks (BPD) 2 National Banks Type of Loan Investment Investment Investment(60%), Working Capital (40%) Interest rate (Efective) SBI 10,06% 11% Technical Assitance - Regional Consultant Regional Consultant
    10. 10. MECHANISM MOE Financial Institution (s) End Users 1 2 3 4 5 <ul><li>Legend: </li></ul><ul><li>MSEs submit the proposal to FIs </li></ul><ul><li>FIs require the Technical Recommendation from MoE </li></ul><ul><li>MoE process and the technical recommendation (incl. site visit) </li></ul><ul><li>MoE issues the technical recommendation </li></ul><ul><li>FIs (after approval of the financial feasibility) channel the fund </li></ul>
    11. 11. PARTICIPATING BANKS There are 1 2 Banks participate in the program : - 7 National Banks : BNI, CIMB Niaga, Export Import Bank, Mandiri, BII, Danamon, Syariah Mandiri - 5 Regional Bank : Bank Bali, Bank Central Java, Bank West Java, Bank West Sumatera,
    12. 12. Capacity Building Program <ul><li>Soft Loan provide some fund for Capacity </li></ul><ul><li>Building Programs by : </li></ul><ul><ul><li>Providing Financing Consultant to assist banks on environmental investment </li></ul></ul><ul><ul><li>Develop quidelines for bankers </li></ul></ul><ul><ul><li>Increasing Awareneess by : </li></ul></ul><ul><ul><ul><li>Having internal workshop for analist officer </li></ul></ul></ul><ul><ul><ul><li>Having/attending seminar/international for high level of bankers </li></ul></ul></ul>
    15. 15. Capacity 1 ton/day (2 batch) in Pesantren, Makassar
    16. 16. Closing Remarks <ul><li>With bussiness approach, ESG is more accepted by Indonesian banks, which are very strictly regulated by Banks, Financial incentive need o promote env investment also provide triple win solutions </li></ul><ul><li>The role of all stakeholders, including banks in financing environmental investments greatly encourages more environmentally friendly enterprises </li></ul><ul><li>several industries finally show that financial benefits could be achieved through environmental Investment, banks gradually started to see that environmental investments can be interesting and financially rewarding </li></ul>
    17. 17. Further Information : www. menlh pinjamanlunak tolo @ menlh Ministry of Environment (Kementerian Lingkungan Hidup) Jl. DI Panjaitan Kav 24 Jakarta Timur, Indonesia Telp (62)-(21)-8517161