How Indonesia Taxonomy Can Accelerate Climate Financing and Prevent Greenwashing

Indonesia requires a total investment of USD 285 billion to achieve its 2030 climate targets, yet a significant funding gap persists. The government has allocated USD 96.9 billion, which constitutes 34% of the total required investment, through its annual climate budget, equivalent to approximately 4.3% of the state budget. Additionally, the financial sector contributes USD 41.67 billion, accounting for 15% of the total need. Despite these contributions, an investment gap of USD 146.43 billion remains, representing 51% of the required funding. Addressing this gap is crucial to meeting Indonesia’s enhanced Nationally Determined Contribution (NDC) commitments (MoF, 2021).

The Indonesian government, through its Financial Service Authority (OJK), introduced the Indonesia Taxonomy for Sustainable Finance or Taksonomi Keuangan Berkelanjutan Indonesia (TKBI) in February 2024. Taxonomies are structured frameworks that classify economic activities based on their environmental sustainability, providing a standardized guide for investors and financial institutions to direct funds toward projects that contribute to objectives such as climate change mitigation, adaptation, protection of healthy ecosystems and biodiversity, resource resilience, and transition to a circular economy.

While the previous document, Green Taxonomy of Indonesia (THI) remains applicable, TKBI focuses specifically on supporting environmentally sustainable and transitional activities, particularly in critical sectors like energy. This dual approach ensures comprehensive coverage across various industries. However, while TKBI is a promising framework, its success depends on addressing implementation challenges and mitigating the risk of greenwashing.

One of the primary concerns surrounding TKBI is the potential for greenwashing due to its classification system. By limiting categories to only “green” and “transition,” TKBI introduces significant flexibility that allows fossil fuel-based activities, such as high-efficiency coal power plants and gas-powered projects, technologies for carbon capture and storage (CCS), relying on nuclear energy, or mining critical minerals to support energy transition to qualify for financing under the pretext of energy transition. Moreover, Civil Society Organizations (CSOs) criticized the removal of the explicit “red” category, which previously flagged harmful activities to the environment and society. The taxonomy document also facilitated the Remedial Measures to Transition as part of its essential criteria that may enable funding for previously unsustainable activities if they demonstrate a commitment to transition, but such commitments are often vague and unverified. In addition, the lack of stringent criteria and monitoring mechanisms introduces moral hazard that enables companies to leverage the transition category for marketing purposes without making substantial efforts to adopt fully green practices. Furthermore, the absence of clear penalties for failing to meet remedial commitments exacerbates the risk of greenwashing. Such shortcomings not only undermine TKBI’s credibility but also jeopardize the government’s ability to meet its emission reduction targets under the NDCs and NZE commitments.

Strategic Recommendations for Enhancing TKBI Implementation

To strengthen TKBI’s implementation and ensure its credibility, the following strategic actions are recommended:

• Make TKBI implementation mandatory across financial institutions to accelerate the mobilization of funding for climate crisis mitigation and adaptation efforts. Mandatory application would provide a consistent framework for all stakeholders.
• Ensure meaningful participation of local communities, Indigenous peoples, civil society organizations (CSOs), industry representatives, and international organizations in policy development. Collaboration should extend to designing training and education programs for banks on Environmental, Social, and Governance (ESG) principles, as well as building robust systems for measuring and evaluating bank performance. This includes clear indicators to assess the social impact of sustainable banking activities.
• The reintroduction of a “red” classification is proposed to identify activities that do not support green economy objectives or the transition to sustainability. This red classification would serve as an early warning mechanism, alerting investors and financial institutions to potential environmental and social risks, thus guiding them toward more prudent decision-making. Additionally, the introduction of an exclusion list could help the financial sector avoid funding businesses, sectors, activities, or projects that are unsustainable or harmful to the environment and society.
• Base the taxonomy’s development on robust scientific methodologies to ensure credibility and alignment with international environmental standards. Clear, evidence-based criteria should underpin all classifications to maintain integrity and consistency.
• Establish detailed Technical Screening Criteria (TSC) that go beyond simple ownership of sustainability certifications. These criteria must align with TKBI’s environmental goals and incorporate scientific rigor to assess the eligibility of activities for sustainable finance.
• Require companies financed under TKBI to adhere to transparent and accountable reporting standards. These standards should extend to supply chains, ensuring that the environmental and social impacts of financed activities are monitored comprehensively.
• Conduct public awareness campaigns to build a broader understanding of TKBI’s goals and mechanisms. Enhanced understanding among stakeholders will drive greater accountability and support for the framework.

While the introduction of TKBI represent an important step towards aligning Indonesia’s financial system with sustainability goals, its success depends on addressing the current gaps in its structure and implementation. Strengthening the framework through mandatory implementation, clear classification categories and rigorous monitoring mechanisms will be crucial in ensuring that financial institutions contribute meaningfully to Indonesia’s climate targets. The reintroduction of a “red” category and the establishment of an exclusion list would provide much-needed clarity, helping to prevent greenwashing and ensuring that investments are directed toward truly sustainable projects. By ensuring robust scientific criteria, transparent reporting, and broad stakeholder engagement, TKBI can become an effective tool in driving the nation’s transition to a green economy while safeguarding environmental and social outcomes.