The latest research from CPI reveals a significant climate investment shortfall in Indonesia, totaling approximately USD 146.4 billion, or a deficit of 51%, to achieve its 2030 Nationally Determined Contribution (NDC) targets. Between 2015 and 2021, public and private financial institutions contributed just USD 41.7 billion, representing only 15% of the required climate finance. Private financial institutions' contributions were even lower, accounting for merely 3% of their total investments. This gap highlights the immense potential for aligning private sector investments with Indonesia’s sustainability goals. Recent policy reforms, including the P2SK Law and updated regulations, aim to support decarbonization strategies and sustainable finance initiatives. However, challenges such as contradictory policies, regulatory uncertainties, and financing mismatches must be addressed to unlock this potential.

To bridge the substantial climate investment gap, Indonesia is taking progressive steps to align its financial system with the UN Sustainable Development Goals. The Omnibus Law on Financial Sector Development and Strengthening (P2SK Law / Law No 4 Year 2022) underscores the necessity of a comprehensive support framework for a sustainable finance ecosystem. This includes policies, regulations, norms, standards, products, transactions, and financial instruments that facilitate the transition to sustainable economic growth. The law emphasizes the importance of acknowledging the transition period and activities required for sustainable development.

Recent updates to financial sector regulations are designed to bolster national decarbonization strategies. For instance, Version 1 of the Indonesia Taxonomy for Sustainable Finance (TKBI), launched in February 2024, provides a structured approach to categorizing sustainable investments. This taxonomy builds upon the 2022 Indonesia Green Taxonomy and will be further enhanced by TKBI Version 2 in February 2025. Additionally, OJK Regulation No 18 Year 2023 introduces new requirements for issuing debt securities and sustainability-based bonds and Sukuk, amending the previous OJK Regulation No 60 Year 2017. These changes reflect Indonesia’s commitment to aligning with global sustainable finance initiatives.

Despite these advancements, several barriers hinder climate-aligned investments. Contradictory policies, such as fossil fuel subsidies accounting for 9% of state expenditure compared to 6% for climate spending, create market disincentives for decarbonization. Regulatory uncertainties and market risks, including foreign exchange fluctuations and demand volatility, contribute to perceptions that climate-aligned investments are riskier and more expensive. Financing mismatches also pose challenges, as climate projects often require long-term capital, while finance providers rely on short-term deposits and debt instruments. Securing permits and licenses can lead to project delays and cost overruns, resulting in higher borrowing costs that may render projects commercially unviable.

To address these barriers, the report delves into Indonesia’s climate-aligned finance policy landscape, offering recommendations to streamline financial sector policies. By fostering a supportive regulatory environment and enabling alternative financing instruments, Indonesia can significantly scale up climate-aligned investments. This approach will not only help meet the country's NDC targets but also drive sustainable economic growth and resilience in the face of global environmental challenges.