A government policy think tank has suggested that Indonesian banks should increase their investments in Environmental, Social, and Governance (ESG) sectors as a key entry point to accelerate the country’s renewable energy transition. 

Despite commitments to net-zero emissions, the latest ESG Outlook 2025 report by Policy+ highlights that major banks have only allocated a small fraction of their green portfolios to renewable energy projects.

“Our analysis shows that Indonesian banks are committed to net-zero targets and have started financing renewable energy projects under ESG principles. However, ESG investments must serve as a gateway to significantly increasing financing for the renewable energy sector,” Raafi Seiff, Founder and Director of Policy+, said as quoted in a statement on Tuesday, February 25, 2025.

Policy+ is an Indonesian think tank that offers a wide range of advocacy tools to track, promote, and socialize key issues. Their services include developing think pieces, academic articles, roundtable discussions, and policy recommendations.

The report, titled “Strengthening Indonesia’s Banking Sector as Champions of Resilient and Greener Futures”, analyzed three banks − Bank Mandiri, Bank Central Asia (BCA), and United Overseas Bank (UOB) − and found that:

              •            Bank Mandiri allocated Rp8 trillion (US$510 million) for renewable energy financing, only 3 percent of its total green portfolio of Rp264.1 trillion (US$16.8 billion).

              •            BCA allocated Rp2.1 trillion (US$134 million), just 1 percent of its green portfolio of Rp202.6 trillion (US$12.9 billion).

              •            UOB allocated Rp242 billion (US$15.5 million), representing 1.4 percent of its green portfolio of Rp16.8 trillion (US$1.07 billion).

Mixed commitments

While banks have invested in projects, such as the Poso Hydroplant, Kerinci Hydro Power Plant, Lahat Micro Hydro Power Plant, and Jakarta Light Rail Transit (LRT), they continue funding fossil fuel projects, raising concerns about the effectiveness of their ESG commitments.

Jalal, an ESG expert and Chairman of Social Investment Indonesia (SII), emphasized that banks must phase out fossil fuel financing to make their ESG commitments meaningful.

“If banks finance renewable energy while also funding fossil fuels, it undermines their climate commitments. They must gradually divest from fossil fuel projects and tighten financing standards for high-emission industries,” he said.

Jalal said further that prioritizing ESG principles would minimize financial risks, particularly for institutions investing in fossil fuel sectors.

Regulatory callenges

Climate Policy Initiative (CPI) Indonesia emphasized that the financial sector could close 51 percent of Indonesia’s US$285 billion climate investment gap if more capital were directed towards climate-aligned projects.

Luthfyana Larasati, Manager at CPI Indonesia, stressed that stronger regulatory enforcement is necessary.

“Indonesia has the Sustainable Finance Taxonomy (TKBI), but there is no strict enforcement ensuring its implementation. If properly applied, TKBI could accelerate the energy transition and facilitate early retirement of coal power plants as mandated by Presidential Regulation No. 112/2022,” she said.

The Policy+ report underscores the urgent need for Indonesian banks to increase ESG financing and align their investment portfolios with climate action goals. Experts have recommended:

              •            Increasing green financing allocations for renewable projects.

              •            Strengthening regulations to enforce ESG compliance.

              •            Phasing out fossil fuel investments to ensure meaningful climate action.

By prioritizing ESG investments and strengthening financial regulations, Indonesia’s banking sector has the potential to become a leader in sustainable finance and drive the country’s transition toward a greener and more resilient future.