This is part of a series of blogs about net zero investment in different regions of the world outside of UK and EU. The series explores how net zero investment markets vary in different countries and the extent to which they are supporting the net zero transition. Here, Martin Earle takes a look at Indonesia.
Indonesia is the sixth largest greenhouse gas emitter. It is also the world’s fourth most populous country, with rapid population growth, and predicted to be the world’s fourth largest economy by mid-century (currently seventh).
With almost 18,000 islands spreading between the Pacific and the Indian Ocean, Indonesia is the world’s largest archipelago. The country is rich in biodiversity. It is home to over 3,000 animal species (including Komodo dragons, Sumatran tigers and orangutans), has the largest tropical rainforest in Asia and has the largest peatlands and mangrove forests in the world.
But the country’s natural riches are at risk. It is projected that at least 115 of Indonesia’s islands will be underwater by 2100 due to a combination of sea level rise and land subsidence. The capital Jakarta is sinking by such an alarming rate that the Indonesian government has announced plans to move the capital to Borneo. Although government policies have slowed the rate, deforestation and burning of peatlands for development are releasing large amounts of stored carbon into the atmosphere.
The country depends heavily on coal for its electricity generation, although recently signed a $20 billion energy transition financing deal with industrialised countries.
Indonesia currently aims to achieve net zero emissions by 2060. It has clear targets to restore two million hectares of peatlands and rehabilitate 12 million hectares of degraded lands by 2030. But the Climate Action Tracker rates both the target and the country’s policies and action as ‘critically insufficient’.
Although currently not a significant market for most UK investors, Indonesia is a major investment market in Southeast Asia. For example, as of late 2024, the Indonesian Stock Exchange was the largest among the Association of Southeast Asian Nations.
To achieve net zero emissions by 2060, Indonesia will need approximately $1.1 trillion in transition finance. Green investing is relatively early in its development. But in June 2024, the Coordinating Minister for Economic Affairs outlined Indonesia’s strategy for supporting green investment. Indonesia is launching investments across a range of asset classes including green bonds, green sukuk (Sharia-compliant bonds) and carbon trading. It is also funding several infrastructure projects to address the challenges and opportunities resulting from the net zero transition.
In 2018, the Indonesian government set out a framework for green bonds and green sukuk. Under this framework, the proceeds from green bonds or sukuks must be used to finance green initiatives such as:
In 2021, this was upgraded to the SDGs Government Securities Framework.
As of the end of March 2024, Indonesian sustainable bonds in issue comprised $11.8 billion. The public sector represents about two thirds of the market, leading to bonds generally of longer duration.
Indonesia is also pioneering certain types of bonds among Asian issuers, including Sustainable Development Goal bonds and the Indonesia Coral Bond. The latter aims to raise $156 million, including $5 million from the World Bank to finance conservation initiatives for coral reefs.
In September 2023, the Indonesian Stock Exchange launched the Indonesia Carbon Exchange. Indonesia offers a range of carbon credits, including projects to reduce deforestation or promote reforestations, to protect peatlands, or to invest in renewable energy and improved energy efficiency.
Indonesia’s $10.5 trillion sovereign wealth fund, the Indonesia Investment Authority, aims to integrate “ESG principles and standards throughout the investment lifecycle”.
In 2022, the INA began to identify a number of prospective investments in renewable energy, energy transition and nature-based solutions which now include a stake in PT Pertamina Geothermal Energy. This is a business that seeks to “develop Indonesia’s significant geothermal energy potential”.
There is international cooperation with countries such as the US, Japan and Germany. There’s a collaboration with the United States Agency for International Development (USAID) to accelerate Indonesia’s energy transition through renewable energy and electricity modernisation initiatives. Another example is plans announced by the government of Japan to enhance waste management in West Java through a technical cooperation project with the Japan International Cooperation Agency.
ESG investments are beginning to become available to private investors.
One example is the domestic-focused Mandiri Indeks FTSE Indonesia ESG Fund, launched in 2022. The fund has assets under management of about $9 million. It aims to provide investment returns equivalent to the performance of the FTSE Indonesia ESG Index published by FTSE Russell.
Another example is the Batavia Global ESG Sharia Equity Fund, launched in January 2021. It has assets under managements of about $16 million and a global equity remit.
Both funds are relatively newly launched, quite small and with high charges by UK standards. That is perhaps an indication of the emerging nature of this type of investing in the country.
Indonesia is one of the world’s most populous countries and one which is becoming increasingly important economically.
Indonesia is also at the forefront of the move towards net zero. That’s both as a potential victim of the impacts of climate change and as part of the potential solution. A victim not least from the impact of rising sea levels. And a part of the solution given the importance of its rainforests and huge levels of biodiversity it supports.
It is currently well behind where it needs to be on investing in the net zero transition. But it is making positive efforts to change this and pioneering certain types of green investing in Southeast Asia.
Indonesia Country Climate and Development Report
Protecting Forests and Improving Livelihoods in Indonesia (worldbank.org)
Indonesia’s green powerhouse promise: Ten bold moves | McKinsey
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