Climate change, the financial sector and risk perception are linked in a fancy and interdependent relationship. Climate change poses significant risks to the financial sector, each through transitional risks, similar to changes in emissions policies, and physical risks, similar to natural disasters.
These risks not only influence investment decisions but in addition shape the direction of economic policies similar to rates of interest and credit allocation. On the opposite hand, investment decisions also contribute to climate change by investing in clean energy, which supports sustainable development, or in carbon-intensive sectors, which increase environmental impact.
In this context, risk perception plays a key role because how we perceive climate risks will determine investment priorities and their impact on sustainable development.
In Indonesia, the banking sector shouldn’t be exempt from this risk, with 41.2% of its portfolio exposed to climate change risk, particularly within the household, real estate, agriculture and manufacturing sectors.
Bridging the knowledge gap
A study by the Center for Climate and Sustainable Finance on the University of Indonesia (CCSF UI) found a high level of awareness of climate change issues amongst employees of local development banks (SNDBs). Of the 4,345 respondents from 23 SNDBs, 95.45% recognized the existence of climate change and 59.2% recognized its significant impact on the profitability of their institutions.
However, the study also found that half of the SNDB weren’t acquainted with concepts similar to carbon tax, carbon market, carbon trading and carbon exchange.
Dr. Sonny Mumbunan, principal investigator and coordinator of the CCSF UI, highlighted significant challenges, particularly related to understanding these key concepts. “The challenge remains significant as this is the first time they are hearing these terms,” he said at an awareness event on the Climate Risk Perception Survey and the Need for SNDB Capacity Development (December 11).
He also highlighted the strategic role of the SNDB in low-carbon development planning as a part of climate change mitigation efforts. By strengthening governance, increasing capability and aligning with national sustainable development goals, SNDB has the potential to take care of regional economic stability while addressing the challenges of climate change.
Building an economy that’s immune to climate change
In response to the survey results, Suzanty Sitorus, executive director of ViriyaENB, a philanthropic organization focused on climate change issues, praised SNDB staff’s awareness of the results of climate change, noting that it’s more advanced than in lots of other countries that also deny the issue.
However, she stressed that the present instability of each the Indonesian and global economies requires the commitment of all parties to support efforts to mitigate climate change. Suzanty also stressed the importance of assessing the present financial landscape to strengthen the role of SNDB in addressing these challenges.
During the identical discussion, Dr. Bahrudin, senior executive analyst at OJK, emphasized that climate change shouldn’t be only an institutional issue, but in addition has far-reaching impacts on society.
In a concrete step, the Indonesian government published a sustainable finance taxonomy through OJK, which is meant to guide the classification of green finance and encourage banks to pick out profitable projects for financing. In addition, OJK is developing climate risk management and scenario evaluation to be implemented across all SNDBs next 12 months.
These initiatives provide a key foundation for ensuring that the Indonesian financial sector is more resilient to the impacts of climate change, while promoting national economic stability.
