Indonesia green taxonomy 1.0: yellow does not mean go

From Roadmap to Reality: Safeguarding Indonesia’s Sustainable Finance Future

Indonesia’s new financial leadership has a critical mission: to champion sustainable finance. This journey officially began in 2021 with the launch of the Sustainable Finance Roadmap Phase II (SFR II), a five-year plan to steer the financial sector toward a greener future. At the heart of this plan is a powerful tool: the Indonesia Green Taxonomy 1.0.

What Exactly Is a Green Taxonomy?

Think of a green taxonomy as a universal guide for sustainable business. It’s a classification system that color-codes economic activities based on their environmental impact. By defining what’s “green,” “yellow,” and “red,” it helps financial institutions expand their sustainable investments with clarity and confidence.

Indonesia’s Green Taxonomy 1.0 uses this traffic light system:

• 🟢 Green signifies activities with a positive environmental impact, aligned with national goals.
• 🟡 Yellow is for activities that aren’t yet fully green but are in the process of transitioning.
• 🔴 Red is for activities that are environmentally harmful.

The goal isn’t just to label it’s to direct a flood of investment to fill Indonesia’s massive green financing gap. To hit its climate goals, Indonesia needs about $250 billion in investment by 2030, but in 2020, the government could only meet 34% of that need. The rest has to come from the private sector, which has only contributed about 9% so far. This is where the taxonomy comes in, providing a clear map to guide private capital toward sustainable projects.

Already, we’re seeing a positive trend. Over the last three years, banks’ green portfolios have been growing, a sign that the sustainable finance roadmap is starting to work.

The Yellow Problem: A Lack of Clear Direction

While this progress is encouraging, the Green Taxonomy 1.0 needs two things to have a truly powerful impact: credibility and a solid transition plan.

1. Credibility and Interoperability

As countries worldwide develop their own green taxonomies, there’s a risk of creating a confusing patchwork of different standards. This can undermine credibility and make it harder for global green investors to trust and engage with Indonesia’s market.

For a taxonomy to be effective, it needs to be interoperable, meaning it can be used consistently across different stakeholders and regions while still allowing for local context. The ASEAN Taxonomy, for example, is designed with a two-tiered system to ensure this flexibility.

Indonesia’s taxonomy aligns with the basic framework of the ASEAN taxonomy, but to truly be interoperable, it needs to be more specific. It must develop clear metrics and thresholds for its yellow category to show how these activities will transition. Without this, investors are left in the dark about what’s really happening.

2. The Transition Challenge

The yellow category is crucial because it acknowledges the reality that Indonesia’s economy is still heavily reliant on carbon-intensive activities, like fossil fuels. It’s meant to be a stepping stone, a way for these industries to transition.

However, in its current form, Indonesia’s Green Taxonomy 1.0 lacks the specific details needed to make this transition happen. It doesn’t provide clear pathways, timelines, or emission-reduction targets for these “yellow” activities. Without this critical information, there’s a risk that these carbon-heavy projects will become “locked-in” for the long term, making it harder and more expensive to switch to low-carbon alternatives down the line.

Out of 919 sub-sectors analyzed, 422 are currently in this transitional yellow category. Without clear rules for how they must improve, investors have no way of knowing when or if these activities will ever become truly green.

Next Steps: A Living Document

The good news is that the OJK has designed the Indonesia Green Taxonomy as a “living document,” meant to evolve over time. This means there’s an opportunity to fix the current issues and strengthen the taxonomy.

Moving forward, the focus must be on:

• Improving interoperability by aligning more closely with international benchmarks like the ASEAN Taxonomy.
• Developing clear, detailed metrics and thresholds for the yellow category. This includes creating a narrower interpretation of what falls into this category and setting a clear timeline for the shift from yellow to green (or red).
• Updating and synchronizing the taxonomy with existing regulations to ensure all rules are working together.

While these changes will be challenging and time consuming, they are essential. A credible, interoperable, and detailed taxonomy will not only attract more green investment but also provide predictability and reduce the costs of doing business, helping everyone from investors to regulators make smarter decisions on the path to a low carbon future.

source:

https://www.climatepolicyinitiative.org/indonesia-green-taxonomy-1-0-yellow-does-not-mean-go/