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Indonesia’s green sukuk needs a harder look

Indonesia Bali green rice fields and palms from Adobe 230x150
By Morgan Davis
27 Feb 2018

The Republic of Indonesia’s maiden green sukuk last week was a landmark for green finance, becoming the first green sovereign issue in Asia, and one of just a handful globally. Indonesia deserves to be lauded for its efforts, but it’s too soon to judge the country by its one green financing exercise — especially as the nation is far from environmentally friendly.

Indonesia, with more than 13,000 islands, is destined to feel the brunt of climate change. Even so, the country lags in its actions to reverse the course of climate change. It is the world’s fifth largest emitter of greenhouse gases and a leading exporter in coal for power. Palm oil production, which devastates forests, is a key industry in its economy.

It isn’t the only sovereign with a tarnished environmental record to sell green bonds. Poland recently became the only sovereign issuer globally to print a second green bond. But the Eastern European borrower is also hugely dependent on coal and is one of Europe’s top carbon gas emitters.

In some ways, these countries should be at the forefront of green financing for rather obvious reasons — they need the funds more than others to reach sustainability goals, build more efficient infrastructure and start initiatives to cut down on their greenhouse gas emissions. Many market watchers believe the signing of the Paris Agreement in 2016 will push more countries to choose green bonds as a way of financing the sustainability goals they have agreed to.

But there is more than meets the eye and the market needs to be careful that countries with such environmental histories do not use green bonds as simply lip service to show their support for sustainable development.

“Greenwashing” is a popular term bandied about to describe green financing efforts that do more for the public relations of an issuer than real good. Green investors have cause to be wary of deals that may seem green on the surface but will do little to actually promote environmental benefits.

This is particularly the case for any green investor that makes efforts to invest in emerging markets. For instance, China’s continued inclusion of clean coal under its accepted green bond guidelines is a blatant faux pas for most green investors.

Other greenwashing is more subtle. Bond issuers may be putting proceeds to use for green efforts on one side, while continuing to fund environmentally harmful initiatives on the other.

In Indonesia’s case, the government’s efforts to institute more environmentally-friendly policies have been limited. For example, according to Climate Action Tracker (CAT), an independent scientific analysis provider, Indonesia has continued to plan and build new coal-fired power plants to meet electricity demands. Under its current policy settings, CAT predicts a 85%-95% increase in the country’s emissions above its 2010 levels by 2030 from the energy and industry sectors.

That’s not to say the Indonesian ministry of finance won’t ensure its sukuk is used for the right purposes. But the market will have to wait a while before it can see where the proceeds have been funnelled. Part of the challenge for sovereigns in general is making sure they are transparent in their budgets and showing that the green bonds are used the way they are intended. Investors should rightly keep a close eye on this and hold not only Indonesia, but other green borrowers as well, accountable for the use of proceeds.

Selling a green bond is just the first of many steps for countries like Indonesia. Should the money truly be used to further environmentally-friendly initiatives, the government deserves praise for being the first mover in the region.

But the real test will be if Indonesia uses this successful transaction as a catalyst to make effective policy changes and give a further fillip to its sustainability ambitions. Only time will tell. 

By Morgan Davis
27 Feb 2018