What is Sustainable Finance?
Sustainable Finance can be defined as the overall support of the financial services industry for sustainable growth, resulting from the alignment of economic, social, and environmental interests. The banking sector began to initiate to cultivate “Green Banking” related to this definition in contributing to the realization of Sustainable Finance. This concept was developed by the Financial Services Authority (Otoritas Jasa Keuangan, OJK), which is regulated in the Financial Services Authority Regulation (Peraturan OJK, POJK) Number 51/POJK.03/2017. This regulation also includes regulations related to fulfilling the obligation to issue a Sustainability Report annually (described in a separate proposal) and the obligation to prepare a Sustainable Finance Action Plan (Rencana Aksi Keuangan Berkelanjutan, RAKB), which is submitted annually along with the submission of the Business Plan.
Who is required to implement the Sustainable Finance?
There are 3 types of companies that are required to implement Sustainable Finance in their business activities based on these regulations are as follows:
- Financial Services Institutions (Lembaga Jasa Keuangan, LJK), including banking, both commercial banks and rural banks (Bank Perkreditan Rakyat, BPR), Islamic rural finance banks (Bank Pembiayaan Rakyat Syariah, BPRS), capital markets, insurance, pension funds, financing institutions, also others.
- Issuers, namely companies that have made a public offering. This means that the company has entered and is registered in the capital market.
- Public Company, which is a company whose shares are owned by at least 300 parties and has a minimum paid-up capital of Rp3 billion.
What is the background of the Sustainable Finance development concept?
Sustainable Finance began to be developed by considering the environmental aspects in Indonesia. The environment quality is considered to be decreasing, one of which is caused by the company’s business activities. This causes environmental damage that has a national impact.
Sustainable Finance Development is intended to support required companies, especially LJK, in improving social and environmental performance in Indonesia so that they are following International Standards. LJKs will get the benefit because this program will help them to protect their bank loan portfolios against business risks. It will also enable players in the banking industry to identify new business opportunities offered by the green economy.
Although LJK is indirectly involved in the environmental damage that often occurs in Indonesia, it cannot be separated from the problem of increasing environmental degradation. Banks can also be a trigger for activities that have an impact on the environment through lending or financing to customers.
It is necessary to give direct sanctions to minimize environmental damage, aimed at the business activities funding structure of the environmental pollution perpetrators. Green banking also requires LJK to prioritize the economic activities of customers who are included in the eco-friendly category and consider environmental protection aspects in running their business, so that sanctions targeting LJK can be avoided.
What is the purpose of Sustainable Finance?
The purposes of implementing Sustainable Finance are to:
- Provide adequate funding sources for achieving sustainable development goals and financing related to climate change.
- Reducing social inequality and preventing damage to the environment, maintaining biodiversity, and promoting the efficient use of energy and natural resources.
- Develop financial products and/or services that apply the principles of Sustainable Finance.
How is the implementation that needs to be done by required companies in Sustainable Finance development?
In implementing the concept of Sustainable Finance, the following principles are needed:
- The principle of responsible investment;
- Principles of sustainable business strategies and practices;
- Social and Environmental risk management principles;
- Governance principles;
- The principle of inclusion;
- The principle of developing priority leading sectors; and
- The principle of coordination and collaboration.
The development of the Sustainable Finance concept needs to be applied in increasing the loan portfolio. These improvements need to be in line with:
- Implementation of Sustainable Finance;
- BPR internal capacity development;
- Adjustment of the organization, risk management, governance, and/or standard operating procedures of BPR following the principles of implementing Sustainable Finance;
- Sustainable Financial Products and/or Services following the needs of the community that supports priority leading sectors as referred to in the provisions of laws and regulations concerning the national medium-term development plan.
Sustainable Finance concepts, systems, and strategies that have been designed need to be described in the RAKB and submitted to OJK.
The RAKB must describe the following:
- Business activity plans and work programs, both short-term and long-term following the principles of Sustainable Finance;
- Strategies to realize the plans and work programs;
- The target set and the time for achieving the target; and
- Implementation of risk management and compliance with prudential provisions.
LJK is required to:
- Develop a rating of a project or activity in the RAKB based on the principle of sustainability, for example, a proposal is rated as AAA if it does not have a negative impact on the environment and D if the impact is large.
- Develop Standard Operating Procedures for each project rating. For example, a direct financing decision is approved if the project falls into the AAA category.
- Develop procedures to increase participation for stakeholders from the customer’s side. For example, there is a strategy in the project to include the role of local society in carrying out business activities.
- Involving independent parties in the evaluation process and providing input in improving the Sustainable Finance principles.
- Establish a Sustainability Report as a mandatory report to OJK.
These stages certainly require in-depth study and discussion. It takes the role of many parties and in particular the commitment of the board of directors and the board of commissioners.
What do companies need to do when they already have the Sustainable Finance concept?
Sustainable Finance is a form of LJK in paying attention to environmental aspects in running a business. In addition to environmental aspects, LJKs, especially in the banking industry, also need to consider the effectiveness of risk management from environmental and social aspects. The implementation of this rule requires companies to practice and be professional in the process of compliance management, both those working in the current banking industry and those working in industries that are inherently inherent and sensitive to the demands of a green economy, such as plantations, mining, and forestry.
Practitioners and professionals in the field of compliance management can learn more about regulations related to sustainable finance and at the same time follow the development of the international standard ‘ISO/TC322 Sustainable Finance’.
ISO/TC 322 is an international standard for integrating and fusing sustainable considerations with environmental, social, and governance practices (Environmental, Social, and Governance) in decision making on an institution’s investment and financial management in general.
The understanding for compliance management practitioners will be more complete by understanding the regulations that applied nationally, namely POJK as well as international standards of ‘sustainable finance’ based on ISO, as a basis for preparation in integrating the integration of these international regulations and standards with international compliance management systems, which are also based on ISO, namely ISO 19600 for Compliance Management System.
The role of a compliance management consultant is to help organizations, both LJKs and their customers, to develop sustainability strategies through several approaches, including:
- Facilitate the preparation of sustainability strategy documents following the provisions of POJK-51/2017 regulation.
- Assist in preparing the framework for implementing sustainable financial management.
- Develop a sustainability strategy document.
- Provide training and facilitate capacity building to develop the company’s sustainability strategy.