New report from Climate Policy Initiative highlights sub-national green bond opportunities, recommendations to implement
- COVID-19 has impacted Indonesia’s fiscal ability to achieve a target of 23% renewable energy contribution in its energy mix by 2025.
- Municipal green bonds show promising potential to address renewable energy financing issues. Among other benefits, green bonds allow local governments to attract local investors to green municipal projects.
- The underlying challenges of issuing a municipal green bond include complex eligibility requirements and issuance procedures, government inexperience with municipal green bonds, limited market appetite, inadequate profitable projects in the pipeline, and low green awareness in the industry.
- The study analyzes the overall feasibility of implementing green bonds and provides key recommendations for policy members and other industry members.
Jakarta, July 15, 2021 – According to the National Energy Policy and Nationally Determined Contribution (NDC), Indonesia has mandated an ambitious renewable energy target of 23% contribution into the energy mix by 2025, and a reduction in greenhouse gas emissions of 29% by 2030. However, COVID-19 has hindered efforts to achieve these targets as national budgets now prioritize healthcare, social assistance, and small businesses to cushion the negative impacts of the pandemic. These priorities are important, but Indonesia does not have to ignore its commitment to combat climate change – the next global crisis.
In a new study released today, “Accelerating renewable energy finance in Indonesia: The potential of municipal green bonds,” Climate Policy Initiative (CPI) proposes the use of municipal green bonds—sovereign bonds that support positive climate/environment benefits—to help address Indonesia’s energy transition investment gaps. The report analyzes the overall feasibility of implementing such bonds, highlighting how large-scale projects built on government assets are necessary to achieve scale and attract private investments in the long term. Key municipalities with adequate fiscal capacity to borrow, such as Central Java, West Java, and Jakarta, have projects planned to install solar panels on municipal government buildings and public schools, but are unable to find adequate financing.
“Despite their potential, Indonesia’s capital market is yet to see the issuance of municipal green bonds due to multiple challenges. Complex bureaucratic procedures in the subnational regions as well as the lack of adequate finance stood out as the core hurdles in our study, despite recent efforts in the Omnibus Law to erase the need for parliamentary approval of municipal bonds. Indonesia’s energy transition target, the existence of local governments with high fiscal capacity to issue bonds, and the rising appetite for green bonds in local governments and markets are the key overarching reasons why municipal green bonds are a good idea for Indonesia, especially in the long run. It is worth mitigating the barriers,” said Tiza Mafira, Associate Director at CPI. “We also found that provinces like DKI Jakarta and West Java are the market favorites given their strong fiscal capacity, professional human resources, and more potential projects,” she added.
The study identifies the key implementation barriers for municipal green bonds:
- Complex eligibility requirements and issuance procedures
- Requirement for high credit ratings as investors are mostly motivated by commercial interest
- Inadequate profitable projects in the pipeline, technical and regulatory hurdles, low green awareness in the industry, and additional costs discourage investors to include green bonds in their annual portfolio
“Bond market participants we surveyed in the study reveal that bond ratings, issuers’ reputation, bond tenor, and bond market liquidity/depth in Indonesia are crucial for their decision to invest in municipal green bonds,” said Albertus Siagian, Analyst at CPI. Market participants were also not convinced about the local government’s readiness in issuing municipal green bonds due to the limited number of profitable renewable energy projects, inexperienced bureaucrats, and the additional costs to increase green awareness in the industry. However, if the local government successfully sells the bond to large institutions (such as Badan Penyelenggara Jaminan Sosial – BPJS) or even foreign parties (if allowed), then local market participants would be motivated to follow behind.
The report also provides clear recommendations for policy makers to accelerate municipal green bond issuance:
- Simplification of issuance requirements and procedures
- Clear and consistent policies on renewable energy from the central government to convince local investors to consider subscribing to municipal green bonds
- Local governments should consider selling green municipal bonds to quasi-government institutions
“CPI’s Senior Advisor, Vikram Widge stated that “Municipal green bonds have huge potential and are critical for Indonesia to remain on track and achieve its national energy transition goals. Like we mention in the report, ensuring clear and consistent policies on renewable energy, simplifying the issuance requirements and procedures, and facilitating sale of green municipal bonds to quasi-government institutions would be key to their success.”
To access the full report and infographics, please click here: https://bit.ly/Gbonds
CPI is an analysis and advisory organization with deep expertise in finance and policy. Our mission is to help governments, businesses, and financial institutions drive economic growth while addressing climate change. CPI has six offices around the world in Brazil, India, Indonesia, Kenya, the United Kingdom, and the United States. In Indonesia, CPI focuses on supporting the climate goals and development objectives set by the Government of Indonesia, while at the same time maintaining strong economic growth and alleviating poverty. The team expertise lies in climate finance effectiveness and innovation, covering both energy and land use issues. CPI works closely with the Ministry of Finance, PT Sarana Multi Infrastruktur, Ministry of Environment and Forestry, and the Ministry of Energy and Mineral Resources to support innovative financing instruments and scaling up finance for renewable energy and energy efficiency.
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