Footing the bill: Innovative financing for climate action in Indonesia and the pioneering of Green Sukuk

The costs of climate change loom large for Indonesia, the world’s 4th most populous nation. Rising to the challenge, the Government is forging new and innovative financing instruments, including issuing the world’s first Green Sukuk.

On January 1 this year, torrential rain began to fall across Indonesia’s capital Jakarta and the neighbouring provinces of West Java and Banten.

Seemingly relentless, the rain triggered widespread floods and landslides, and large-scale evacuation and relief efforts. According to official reports, over the course of 7 days, the lives of 66 people were lost, with more than 36,000 people displaced and more than 1,300 homes severely damaged (AHA Centre, January 6).

While a number of factors led to the disaster, the head of the country’s Meteorological, Climatological, and Geophysical Agency (BMKG) told media the following month that climate change was a key contributor.

Indeed, climate change is contributing to a range of more frequent and severe extreme weather across Indonesia’s 17,000 islands: from floods to storms to more prolonged droughts.

The consequences for people, the environment, and the economy are projected to be costly. One study found that the total costs imposed on Indonesia in 2050 by climate change — in the areas of agriculture, health, and gradual sea-level rise — are estimated at 132 trillion Indonesian Rupiah (US$9.2 trillion), around 1.4 percent of the economy as measured by GDP.

Recognising the magnitude of the challenges, the Government has set out to reduce both the drivers and the impacts of climate change.

Siti Nurbaya Bakar, Minister of Environment and Forestry of the Republic of Indonesia, signs the Paris Agreement at the United Nations in New York on 22 April 2016. Photo credit: UN Photo/Rick Bajornas

The country’s climate pledge under the global Paris Agreement (Nationally Determined Contribution, or NDC), makes an unconditional commitment to reducing greenhouse gas (GHG) emissions by 29 percent by 2030 compared to business-as-usual (with a conditional commitment of up to 41 percent with international support) and emphasises the importance of adaptation and improving resilience across all sectors of development.

Even if the world manages to collectively rein in emissions, the bill for action will be high (the UN Environment Programme has found the cost of adapting to climate change in developing countries could rise to between $280 and $500 billion per year by 2050).

The question is — how do we finance it?

Introducing Green Sukuk

Recognising that relying on the national budget alone will not be sufficient, the Government has urgently been looking at untapped resources and new means of financing.

One innovative outcome has been the creation of ‘Green Sukuk’, or Sharia-compliant bonds to finance climate change mitigation and adaptation.

UNDP has provided ongoing support to the Ministry of Finance and relevant line ministries in developing and issuing Green Sukuk, including providing technical assistance and capacity-building, assisting with project selection, impact reporting, advocacy at national and international events, as well as analysis and research development.

Since leading as the world’s first sovereign Green Sukuk issuer in 2018 (oversubscription of which signalled huge interest from the global market), the Ministry of Finance has raised more than $2.75 billion from three annual issuances.

The proceeds have financed and re-financed projects across five sectors: renewable energy, energy efficiency, sustainable transportation, waste to energy and waste management, as well as climate resilience for vulnerable areas.

The proceeds of Green Sukuk have helped finance projects such as energy-saving solar energy lights in previously un-electrified rural areas and construction of urban railway infrastructure supporting increased capacity for commuter trains. Photo credits: Ministry of Finance, Indonesia

Further to investing in projects reducing GHG emissions — projected to be up to 8.9 million tons of CO2e (carbon dioxide equivalent) — proceeds have supported the construction of over 690 kilometres of railway tracks; an increase of 7.3 million kWh of electricity capacity; and improved solid waste management for more than 5 million households.

The initiation of Green Sukuk has shown the Government’s commitment to addressing climate change and mainstreaming innovative financing to achieve the Sustainable Development Goals, while also strengthening Indonesia’s position in the global Shariah market. At the same time, the sale of Green Sukuk to traditional, Islamic, green, and millennial investors has signalled growing market demand for sustainable and responsible investment. The outlook for growth is optimistic.

“The Green Sukuk initiative has paved the way for capital flow for our sustainable future.” Sri Mulyani Indrawati, Minister of Finance

Meeting the costs of climate action is expensive, and going to become more so. With Green Sukuk, Indonesia has shown how innovative financing can help meet the shortfall — and how both private and public investment can be brought to bear in the quest for a more just, low-carbon, sustainable future.

Through the NDC Support Programme and now Climate Promise, the UN Development Programme (UNDP) has been supporting the Government of Indonesia across the area of climate finance, including the development and implementation of a Climate Change Fiscal Framework; improved understanding and management of climate-related spending through climate budget tagging; and the exploration of new and innovative financing instruments in partnership with the public and private sectors.

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Source: Green Sukuk Issuance Allocation and Impact Report — March 2020

Links for more information

Green Sukuk Allocation and Impact Reports, 2019 and 2020

‘Republic of Indonesia: Green Bond and Green Sukuk Framework’ (developed with the support of HSBC and UNDP)

Study, Indonesia’s Retail Green Sukuk

Publication, ‘Indonesia’s Green Bond and Green Sukuk Initiative’