Climate change has become a worldwide issue in the past decades. Countless studies have been conducted to explain the cause and provide insights on how to prevent more severe damage. Most scientists agree that the earth’s surface temperature has increased by around 0.4–0.8 degrees Celsius over the past 100 years.
Research also predicts that average global temperatures could rise by another 1.4 to 5.8 degrees Celsius by the year of 2100. Higher temperatures can also lead to rising sea levels due to the melting of the polar ice caps as well as an increase in the occurrence and severity of storms and other extreme weather events.
One of many indicators showing how serious climate change has become is The Global Climate Risk Index (CRI), published by Germanwatch. The CRI basically indicates the level of exposure and vulnerability to extreme events that countries should understand and use as a warning to prepare them for more frequent and/or more severe events in the future.
CRI result shows that many Asian countries have suffered from climate change over the last two decades. Indonesia itself is ranked in the middle tier, which means the country is fairly exposed to climate change, although not to an extreme degree.
Another research study that focuses on how climate change affects countries is the Global Adaptation Index by Notre Dame University (ND-GAIN). ND-GAIN summarizes a country’s vulnerability to climate change and other global challenges in combination with its readiness to improve resilience.
The difference between the CRI and the ND-GAIN is that the ND-GAIN also measures a country’s ability to leverage investment for adaptation.
It aims to help businesses and the public sector prioritize investment for a more efficient response to the immediate global challenges ahead. The results show that Indonesia once again ranks in the middle, with both vulnerability and readiness scores tending to improve slowly.
The conclusion from those research efforts is that while Indonesia will not suffer the most from climate change, it should start raising awareness and improving its readiness for climate risks. A tropical country like Indonesia tends to be exposed to various climate risks, such as drought, earthquakes, forest fires, tsunamis and floods.
Nowadays, most developed countries are already taking serious measures to suppress climate risks, including measures by governments, society and businesses.
The financial sector is gaining more attention recently, because day-to-day financial business turns out to quite strongly affect efforts to control climate risks. Many high-level conferences have been organized, including the United Nations Environment Programme’s Financial Initiative (UNEP FI), which counts more than 200 financial institutions across the world among its members.
It has two members from Indonesia, Bank Jabar Banten (BJB) and Bank Negara Indonesia (BNI). The main goal of the UNEP FI is to implement systemic change in finance to support a sustainable world.
Another global initiative to promote sustainable finance is the Equator Principle (EP), which involves more than 70 global financial institutions. They have committed themselves to refuse loans of US$10 million or more to debtors that fail to comply with social and environment standards set by the EP.
Indonesia is also actively involved in suppressing greenhouse gas emission. At the Pittsburgh Summit of 2009, Indonesia pledged to reduce greenhouse gas emission by 26 percent in our own efforts, while targeting to cut more than 40 percent of gas emissions with international intervention.
The commitment was later translated to Rencana Aksi Nasional Gerakan Rumah Kaca (RAN GRK or the Greenhouse Movement National Action Plan), which engages a wide range of ministries and government institutions.
The Financial Services Authority (OJK), meanwhile, has issued the Roadmap for Sustainable Finance in Indonesia 2015-2019, which focuses on four key principles of sustainable financing. They are risk management, sustainable priority economic sector development, environmental and social governance and reporting, and capacity enhancement and collaborative partnerships.
In the short run in 2016, the OJK aims to prepare incentives needed for sustainable finance, including prudential rules, an information hub, awards and a reporting policy. In the long term, from 2019 to 2024, the OJK targets to integrate social and environmental aspects in risk management and corporate governance.
The OJK recently initiated a green banking pilot project, dubbed as the first step toward creating sustainable banks. The initiative includes collaboration with eight major national banks, including Bank Mandiri.
The first phase of the project will focus on the palm oil sector, since it is frequently associated with environmental issues. The OJK expects that this pilot project will come up with series of recommendations to implement green financing.
In the long run, the OJK wants to make it difficult for companies that damage the environment to obtain loans and financing. Banks’ credit quality will automatically worsen as well if banks lend funds to environmentally damaging companies.
Although more detailed regulations are still in the drafting stage, Indonesian financial institutions should gradually start building sustainability partnerships with their clients, while also spreading awareness on green finance to other institutions. Financial institutions, especially banks, will function as intermediaries and play a role as agents of change.
Sooner or later, sustainable financing could become mandatory. So the question is, are we ready to finance change.
The writer is a researcher at Mandiri Institute.