Future Wave: The Growth of Green Bonds in Indonesia

Future Wave: The Growth of Green Bonds in Indonesia Indonesia s economy has recorded strong growth over the past few decades. The economic performance has been shaped by government policy, a young and growing labor force and the utilization of Indonesia s abundant but finite natural resources. It s clear that for businesses to be able to continue creating value in the future, they need to evolve and become more sustainable. Sustainability in this sense is defined as meeting present needs without compromising the ability of future generations to meet their needs. 1 The need to consider sustainability issues such as climate change, pollution and natural resource depletion have revolutionized the way businesses operate and driven innovation across industries. Clean technology, such as solar power and wind turbines, is gaining stronger traction in the market, while process efficiency, waste reduction and emissions prevention are becoming global industry norms. Such a shift in business practices requires significant amounts of investment. UNFCCC identified that clean development requires investment amounting to US$200-210 billion per annum by 2030 2. The Indonesian Ministry of Finance, through its Climate Budget Tagging mechanism, has identified more than Rp 78 trillion ($5,7 billion) of FY 2017 national budget component related to climate change impacts, amounting to a 32 percent increase over the FY 2016 budget. 3 Several market instruments have been developed to seize the investment opportunity, one of which is Green Bonds. The unique characteristic of Green 1 Bruntland Report for the World Commission on Environment and Development (1992) 2 Investment and Financial Flows to Address Climate Change, United Nations Framework Convention on Climate Change, 2007 3 Indonesia Climate / Green Investment Plan, presentation by Badan Kebijakan Fiskal Kementerian Keuangan RI on Technical Workshop on Green Bonds in Indonesia, January 2018 1

Bonds is the requirement that the proceeds must be invested in projects that generate environmental benefits ( green projects ), otherwise, they are no different from conventional bonds. The first Green Bonds was issued in 2007 by the European Investment Bank, as a structured bond with proceeds dedicated to renewable energy and energy efficiency projects. Since then, Green Bonds have gained tremendous momentum. The Climate Bonds Initiative reported that between 2016 and 2017, the Green Bonds market grew by 78 percent expanding from $87.2 billion to $155.5 billion. 4 Green bond Issuance in USD billion 180 160 140 120 100 80 60 40 20 0 Green bonds market since 2010 2010 2011 2012 2013 2014 2015 2016 2017 Year Figure 1 : Green Bonds market issuance since 2010 5 Source: (historical data): Climate Bonds Initiative, Moody s, Environmental Finance, Market Realist Source (current market value): The Green Bonds Database, as at 11/12/2017 In response to the sustainability and development challenge facing Indonesia as well as the investment opportunities offered by clean development, the Financial Services Authority (OJK) has issued a series of sustainable finance polices to encourage a shift in the Indonesian economy towards sustainable and low carbon economic growth. In December 2017, the OJK issued a regulation on Green Bonds that is geared towards raising the capital for green projects. OJK Regulation number 60/POJK.04/2017 sets out the standard for Green Bonds issuance in Indonesia. This standard is an amalgamation of globally accepted Green Bonds standards, such as the Green Bonds Principles, the ASEAN Green Bonds standards and the Climate Bonds Initiatives, with specific adaptation for the Indonesian capital market. In January 2018, the OJK, Indonesian Ministry of Finance and The World Bank held a joint technical workshop on Green Bonds. The workshop explored the regulatory framework and guidelines for issuing Green Bonds in Indonesia juxtaposed against regional and global standards, guidance on the process of issuing Green Bonds and the case study of Malaysia which issued the first Green Sukuk in June 2017 6. EY has assisted with both the development of Green Bonds frameworks over the last decade and supported over $7.5 billion of Green Bonds issuances globally. 4 Green Bonds Highlights report 2017 Climate Bonds Initiatives 5 Climate Bonds Initiative, Moody s, Environmental Finance, Market Realist Source (current market value): The Green Bonds Database, as at 11/12/201 6 https://www.sukuk.com/article/malaysia-launches-the-worlds-first-green-sukuk-6361/ 2

EY Indonesia was invited to share its experience in assisting Green Bonds issuances for corporate, commercial banks and other institutions. Particularly, this session was made to raise awareness about the importance of third party assurance in ensuring the integrity of Green Bonds for investors. What is the Indonesia s approach to the Green Bonds issuance? As any other type of bonds in the Indonesian capital market, issuers of Green Bonds must adhere to the capital market regulation on debt securities, with additional characteristic of 7 : Eligible projects - Green Bonds can only be issued to finance eligible green projects. The regulation specifies 11 types of eligible green projects, including renewable energy, energy efficiency, biodiversity conservation, clean transportation, climate change adaptation, and sustainable waste management. Use of proceeds - The regulation stipulates a minimum of 70 percent of proceeds from the Green Bond sale shall be used to finance the agreed green projects. Management of proceeds - Issuer has to manage the proceeds from green bond and report on the use of proceeds. As part of the management of proceeds, issuer should create a separate account or disclose in a specific note in the financial statement. The potential of Green Bonds to raise finance to support Indonesia s transition to a low carbon economy is significant and there are positive signs, from both the regulatory end with the issuance of the OJK s new regulation and the interest from a range of companies and Ministries, that 2018 will see more of the issuance of a Green Bonds in the Indonesian market and EY looks forward to supporting this important development. Rebecca Razavi Executive Director Climate Change and Sustainability Services (CCaSS) EY Indonesia Reporting and verification - The environmental benefit of the projects should be clearly defined and verified by an independent third party. The performance of the green bond and projects should be reviewed by an independent third party and the result shall be reported annually to the Financial Services Authority. In the case that the underlying projects no longer meet the green project criteria, the issuer shall define the action plan for remediation and will be given one year to execute the action plan. In the case that the action plan fails to restore the green eligibility criteria of the project, the bond holders may seek the issuer to buy back the green bond or to increase the coupon rate. The opportunities are there Investment required for climate change mitigation to limit the global warming to two degree Celsius is predicted to be between $200 - $210 billion per annum in 2030 8. As mentioned previously, Government of Indonesia had tagged Rp 78 7 Peraturan Otoritas Jasa Keuangan Nomor 60/POJK.04/2017 tentang Penerbitan dan Persyaratan Efek Bersifat Utang Berwawasan Lingkungan (Green Bonds). 8 Investment and Financial Flows to Address Climate Change, United Nations Framework Convention on Climate Change, 2007 3

Green Bonds have opened a new finance flow that will be essential to confronting climate change. They are providing green investment opportunity for an ever wider investor group, including those who wish to divest and diversify from fossil fuel-intensive portfolios, and they have proven that a stream of investor capital exists for green assets. Rachel Kyte 9 World Bank Group Vice President and Special Envoy for Climate Change trillion (USD 5,7 billion) budget component in FY2017 as related to climate change mitigation/adaptation. The tagging mechanism is done through Climate Budget Tagging in six key ministries in State Budget FY 2016 and 2017 to track resources spent to achieve the national emission reduction target of 29 percent by 2030. Green Bonds were traditionally demanded by environmentally and socially responsible investors. However, currently the market opportunities have extended beyond this category of investors, with a growing number of asset managers having mandates to increase investment in instruments that support low-carbon growth. For example, investors with $45 trillion of assets under management as Principle of Responsible Investing (PRI) signatories have made public commitments to climate sensitive and responsible investments. Furthermore, research from Nielsen and Morgan Stanley reveals an encouraging future for Green Bonds: 66 percent of global consumers are willing to pay a sustainability premium for products and services. 72 percent of millennials are willing to pay such a premium. Women investors are twice more likely to consider impact when investing. Among all investors, millennials are twice more likely to make investments that target environmental and social outcomes. The OJK have also noted that the efforts of the regulator, relevant Ministries and wider partners are bearing fruit with environmentally responsible investment gaining traction in the Indonesia capital market. Indonesia had made the first step to actively participate in Green Bond market, by issuing USD 1.25 million sovereign Green Sukuk in February 2018 to fund a number of environmentally friendly projects such as renewable energy, green tourism, and waste management projects. Competition of JCI dan SRI-KEHATI Index 2008-2017 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* IHSG 1,335.4 2,534.3 3,703.5 3,821.9 4,316.6 4,274.1 5,226.9 4,593.0 5,296.7 6,021.8 Sri Kehati 146.37 192.03 204.02 231.12 233.26 299.56 265.16 310.19 363.18 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 * 10 November 2017 Source: Capital Market Statistic OJK Figure 2 : JCI and SRI-KEHATI Index 2008 2017f 9 Source: http://www.worldbank.org/en/topic/climatechange/brief/green-bonds-climate-finance 4

Keeping it up The success of Green Bonds relies on their ability to maintain the environmental benefit of the investment and build trust in the market of their green claims. Therefore, most Green Bonds standards encourage or require the issuers to undertake an assessment or review by independent opinion providers to ascertain the greenness of the underlying projects/assets of the Green Bonds. Second opinion providers and verifiers play a very critical role in the process; building trust, integrity and transparency needed to facilitate a credible Green Bonds market. Typical third parties oversight on Green Bonds issuance are: Consultant review: An issuer can seek advice from consultants and/or institutions with recognized expertise in environmental sustainability or other aspects of the issuance of a Green Bonds, e.g.: Second party opinion of an issuer s Green Bonds framework. Verification: An issuer can have its Green Bonds, associated Green Bonds framework, or underlying assets independently verified by qualified parties, such as auditors. In contrast to certification, verification may focus on alignment with internal standards or claims made by the issuer, e.g.: Environmental features evaluation of underlying assets. Certification: An issuer can have its Green Bonds or associated Green Bonds framework or Use of Proceeds certified against an external green assessment standard. An assessment standard defines criteria and alignment with such criteria is tested by qualified third parties/certifiers. Rating: An issuer can have its Green Bonds or associated Green Bonds Framework rated by qualified third parties, such as specialized research providers or rating agencies. Green Bonds ratings are separate from an issuer s ESG rating as they typically apply to individual securities or Green Bonds frameworks/programs. 5

We can always help you The developing green market has to deal with several challenges such as clear definition of what is considered green, procedures on how the Green Bond proceeds should be used, tracked, managed and reported, and the lack of verification requirements over the information reported. Given that Green Bonds are long-term financing vehicles, the reputational risk to issuers extends for many years across the life of the bond and beyond. Therefore, it is recommended to seek expert advice to reduce that risk. EY can either advise a Green Bonds issuer on developing the green criteria and maintaining it over the life cycle of the bonds, or conduct verification and ensure that the issuer is following the defined green criteria throughout its life cycle. With its leading role as an advisory and assurance services provider across sectors, in the areas of environment, health and safety, energy, renewables, climate change mitigation and adaptation, EY brings in a multidisciplinary team to help navigate through the process. The combined expertise of EY s Transaction Advisory Services (TAS) with debt/capital raising advisory capabilities and EY s Climate Change and Sustainability Services (CCaSS) group, we can provide clients with end-to-end assistance as they embark on the Green Bonds journey. 6

Let s continue the conversation Find out how we can help you tackle your sustainability challenges at ey.com/id/services/assurance/ climate-change-andsustainability-services Rebecca J. Razavi Executive Director Climate Change and Sustainability Services Tel: +62 21 5289 5171 rebecca.razavi@id.ey.com Jongki D. Widjaja Partner Assurance Services Tel: +62 21 5289 4003 jongki.widjaja@id.ey.com Fabiana Tia Maria Manager Climate Change and Sustainability Services Tel: +62 21 5289 5382 fabiana.maria@id.ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Climate Change and Sustainability Services Governments and organizations around the world are increasingly focusing on the environmental, social and economic impacts of climate change and the drive for sustainability. Your business may face new regulatory requirements and rising stakeholder concerns. There may be opportunities for cost reduction and revenue generation. Embedding a sustainable approach into core business activities could be a complex transformation to create long-term shareholder value. The industry and countries in which you operate as well as your extended business relationships introduce specific challenges, responsibilities and opportunities. Our global, multidisciplinary team combines our experience in assurance, tax, transactions and advisory services with climate change and sustainability knowledge and experience in your industry. You ll receive tailored service supported by global methodologies to address issues relating to your specific needs. Wherever you are in the world, EY can provide the right professionals to support you in reaching your sustainability goals. 2018 PT Ernst & Young Indonesia. All Rights Reserved. APAC No. 00000302 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/id 7