The Indonesian Financial Services Authority (OJK) has recently updated its “Indonesian Taxonomy for Sustainable Finance” (TKBI) on 20 February 2024. The purpose of this update is to bring clarity to the ways in which finance is utilized in environmentally sustainable methods. However, the revised TKBI has the potential to cause confusion among investors and financiers, as well as pose challenges in aligning with international sustainability standards.
Although the TKBI aims to be “interoperable with other taxonomies” and to support national interests, there are concerns regarding its current design. One of the main issues is the classification of financing for new coal-fired power plants as “transitional,” which does not align with standard or science-based practices. This decision has the potential to impact Indonesia’s commitment to reducing emissions under the Paris Agreement.
The TKBI does have positive aspects, such as its alignment with the Asean taxonomy and its clear categorisation of activities into “green,” “transitional,” and “does not meet criteria.” However, the classification of financing for new coal-fired power plants as “transitional” raises questions about its alignment with international standards.
The decision to consider captive power plants associated with critical minerals as “green” activities is also a cause for concern. The inclusion of new coal-fired power plants in the “transitional” category and the lenient technical specifications and criteria for these activities could pose risks to financiers, projects, and the Indonesian public in the long run.
The potential repercussions of the TKBI’s classification of new coal-fired power plants are significant. A recent study has estimated that reducing a coal-fired power plant’s operational life by five years can result in substantial financial losses and increased power costs. This raises questions about the economic impact and financial responsibility associated with the closure of these power plants within the specified timeline.
Additionally, the TKBI’s divergent classifications and lenient approach to defining sustainable activities could pose risks to financiers and projects, potentially making Indonesia less attractive for investments than other jurisdictions, which ultimately does not align with the country’s national interests or contribute to the desired reduction in emissions.
Indonesia’s efforts to contribute to the green transition and enhance the value of its mineral resources are commendable. However, the classification of new coal-generated power as “green” and the permissive standards set by the TKBI could undermine the credibility of the taxonomy and cast doubt on the government’s climate commitments.
It is essential for Indonesia to re-evaluate the classification of new coal-fired power plants and ensure that its sustainable finance taxonomy aligns with international standards. This will not only enhance the country’s attractiveness for financial investment but also contribute to the desired reduction in emissions, ultimately serving Indonesia’s national interests in the long run.
In conclusion, while the updated TKBI has positive aspects, its current classification of new coal-fired power plants and its lenient approach could have indirect costs and create challenges for financiers, projects, and the public. It is crucial for Indonesia to address these concerns and ensure that its sustainable finance taxonomy truly serves its national interest.
The research and analysis discussed in this article were conducted by Ramnath Iyer, Research Lead for Sustainable Finance, Asia at IEEFA. IEEFA focuses on financial and economic issues related to energy and the environment, providing authoritative insights into sustainable finance and energy transition.
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