A leap towards financing for the Sustainable Development Goals
Indonesia’s green sukuk
All Member States of the United Nations have gathered this week in Katowice, Poland for the 24th Conference of Parties (COP) on climate change. The Conference takes place at a time where there is increasing scientific evidence that climate change is real and is already very significantly affecting the lives and the income of millions of people on earth.
Sadly, it is also a time when there are decreasing political commitments and insufficient actions of global scale to effectively address climate change. The result, as the UN Secretary General phrased it at the opening of COP 24, is that “the world is way off course to fight climate change”.
In addition to threatening to reverse human development progress made during the last decades, climate change comes at a high cost. In 2017 alone, it is estimated that those natural disasters caused by climate change led to a staggering US$320 billion loss. However, it is misleading to think in loss terms only. The New Climate Economy report from the Global Commission on the Economy and Climate, for example, shows that for every dollar spent restoring degraded forests, as much as US$30 can be recouped in economic benefits.
Climate actions therefore provide unprecedented opportunities to unlock massive financial flows, which will generate economic and social benefits and help protect our planet and its people. Leveraging untapped financial resources and innovative financing is actually a condition to address climate change and to achieve the Sustainable Development Goals (SDGs). And on this front at least, there is a reason for hope.
The introduction of new financial instruments over the recent years and the potential that exists for their massive development could be a game changer. For instance, the green bond market is a rapidly growing source of finance with issuances coming largely from financial institutions, governments and municipalities. And successful stories are emerging such as the issuance of Green Islamic Bonds or Green Sukuk in Indonesia earlier this year.
In March 2018, the Government of Indonesia through the Ministry of Finance, issued the very first sovereign green sukuk in US dollars. The five-year issuance raised US$1.25 billion and reached a broad range of investors including conventional, Islamic and green investors. In fact, the issuance was oversubscribed, signaling the growing market demand for sustainable and responsible investments.
The green sukuk in Indonesia is an excellent example of the pioneering role of governments in leveraging private finance for green and sustainable development. It is also an illustration of the support that the United Nations Development Programme (UNDP) can provide to governments and investors in the development of innovative financing for development.
UNDP is currently supporting over 140 countries with a climate action portfolio of over US$3 billion, the largest in the UN System. In Indonesia, UNDP partners with the Ministry of Finance on sustainable development financing including instituting a budget tagging system, which is improving the management of public domestic finance.
Building on this initial work, UNDP supported the ministry in the preparation of the issuance of the green sukuk and is now providing technical assistance and capacity building to produce a transparent and accurate impact report, which will show investors that the green sukuk proceeds are indeed being directed to the right investments and delivering on the country’s climate change response.
Indonesia’s green sukuk shows the potential that exists to significantly boost public and private investment in adaptation and building resilience while also reducing carbon emissions. To help harness this potential, UNDP is actively developing new services, tools and systems to support the bond market and innovative financing by:
- Defining and measuring sustainability – i.e. demonstrating that private investments are indeed delivering on both economic and social objectives
- Assessing eligibility for green finance – this begins with designing new types of investment projects and leveraging UNDP’s extensive experience in designing and managing green projects through environmental global funds.
- Demonstrating impact – we are currently developing impact measurement frameworks for the green sukuk and other social impact investments.
In Katowice during COP24, Indonesia will be presenting its Green Sukuk experience at a side event. In Jakarta, UNDP has established an Innovative Financing Lab, a platform that supports the development of new financial instruments for the SDGs, such as Green Sukuk. This is part of our support to Indonesia’s adopting a low carbon development path. Building a greener future for the world can still be achieved.