Time is running out for the climate. And Indonesia – one of the world’s top ten greenhouse gas emitters – is caught between growth with sustainability.

In 2019, Indonesia cemented its position as one of the main contributors to global emissions at an all time high, producing more than 636 million metric tons of CO2 in a year. To combat this, ambitious goals have been made: net-zero emissions country-wide by 2060 and a commitment to rebuilding our economy around renewable energy and sustainable development. Hence, the country is turning to green financing as an emerging lifeline for climate action.

Over the past decade or so, legislators have been taking steps to gradually embed sustainability within the financial system. Firstly, the Otoritas Jasa Keuangan Institute (OJK) has launched the Sustainable Finance Roadmap (Phase II 2021-2025). This set of reforms requires banks and financial institutions to implement environmental, social, and governance (ESG) principles into all their development activities. Additionally, in February 2024, OJK introduced the Taksonomi untuk Keuangan Berkelanjutan Indonesia (TKBI), a classification system that categorizes economic activities based on their contribution to sustainable development in ESG aspects. These systems are the base to guide capital allocation from fossil fuels into projects that have the potential to cut emissions to work towards Indonesia’s net-zero target.

One of the most significant successes was in March of 2018, when the government issued the world’s first sovereign green sukuk. This sharia-compliant bond mobilized 1.25 billion USD and financed renewable energy, energy efficiency, and green transport projects. By 2022, Indonesia’s corporate and state green bond issuances totalled $7 billion, of which the state itself issued nearly 60%. In July 2024, Indonesia renewed its leadership by issuing yet another three-tranche sukuk totalling $2.35 billion, including a historic 30-year green tranche worth $600 million. Not only do these issuances prove the growing investor demand, they also highlight the government’s commitment to financing its net-zero agenda.

In the corporate sector, PT Pertamina Geothermal Energy (PGEO) takes the stand as an example of a company with climate-friendly actions. Two years ago, PGEO issued its first $400 million green bond spanning five years to fund geothermal development. Indonesia has many geothermal reserves, but using them requires huge capital in advance. Because of that, PGEO’s successful allocation displays the readiness of international markets towards supporting Indonesia’s renewable efforts.

However, while successes like PGEO and the sovereign green sukuk display strong momentum, amplifying green financing across the economy remains difficult.

A sizable obstacle Indonesia faces is the funding gap. Between 2020 and 2030, the country will need an estimated IDR 3,779 trillion (343.6 trillion annually) to meet its 2030 carbon emission targets. So far, the government currently allocates only about IDR 112.74 trillion per year towards climate-related programs, which is roughly 4.1% of the national budget. Another pressing challenge is the perceived high risk of green projects. As many renewable and sustainable initiatives require large upfront investments with long payback periods, most financial institutions often view these projects as risky. Consequently, costs tend to be higher, discouraging investors from placing funds into the sector. This perception continues to restrict the growth and attractiveness of Indonesia’s green investments.

Despite these problems, the outlook is far from bleak. The government is already preparing incentives like tax breaks, concessional loans, and grants to attract more private capital into green projects. Moreover, OJK has announced that banks will be required to incorporate climate risk analysis into their decision-making by 2026, which ensures that financial corporations consider the risks of neglecting climate change.

Aside from the private sector, innovation in financial instruments is also increasing. Other than green sukuk and bonds, Indonesia is trialing blended finance (using public funds to catalyse private sector investment), pension fund allocations, and the use of its Indonesia Investment Authority (INA), one of Indonesia’s two sovereign funds, to support broader environmental projects. Lastly, the newly launched Indonesian Carbon Exchange, as a marketplace where emission reductions can generate economic value, greatly impacts Indonesia’s efforts to achieve their goals.

While this journey is still unfolding, it is clear that Indonesia’s progress so far is solid. What is needed now is the development of current efforts, closing the funding gap, and an increase in investor confidence in the green economy. As long as Indonesia keeps their current momentum, there is no doubt that our nation will meet its environmental goals.

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