Will Indonesia’s Revised Taxonomy for Sustainable Finance Truly Serve Its National Interests?

On 20 February 2024, the Indonesian Financial Services Authority (OJK) released an update to the “Indonesian Taxonomy for Sustainable Finance” (TKBI), with the objective of ensuring its compatibility with other taxonomies and furthering national interests. The TKBI, in line with the ASEAN taxonomy, employs a more flexible approach in defining sustainable activities, thereby potentially posing risks to projects and financiers, which could adversely affect the environmental integrity of Indonesia’s processed metal exports.

The revised TKBI classifies activities into three categories: “green,” “transitional,” and “doesn’t meet criteria,” aligning with the ASEAN taxonomy. Additionally, it contains provisions for finance aimed at expediting the closure of coal-fired power plants (CFPP).

However, the decision to classify financing for new coal-fired power plants as “transitional” has sparked concern. This classification undermines emission reduction efforts, especially when considering plans to accelerate the closure of existing grid-connected coal plants and adherence to the Paris Agreement.

The TKBI attempts to justify this inclusion by underscoring the end use of minerals in advancing the energy transition, such as electric vehicles and battery storage systems. Nevertheless, the lenient specifications and criteria introduced, particularly for coal-fired power generation, introduce significant risks. New coal-fired power plants are classified as “transitional” if they are captive to mineral processing or mining units and must close by 2050. The emission reduction targets and reliance on carbon offsets have been criticised for lacking scientific basis.

As a result, financiers and end customers may encounter challenges with the Indonesian taxonomy, leading to increased due diligence and costs. Ultimately, the TKBI could diminish Indonesia’s attractiveness to financial investments, raising doubts about its climate commitments and hindering efforts to reduce emissions.

In conclusion, while the revised Indonesian Taxonomy for Sustainable Finance demonstrates good intentions, it may yield unintended consequences that are not in alignment with the country’s long-term national interests. The risks and implications posed by the leniency in defining sustainability standards could impact the country’s credibility and attractiveness to international investments.

Source:
IEEFA report
Joint study by McKinsey and the Monetary Authority of Singapore (MAS)