TRIBUNJAKARTA.COM - Indonesia, with its biodiversity and archipelagic landscape, is one of the richest countries in biodiversity in the world. However, its vulnerability to the impacts of climate change such as floods and droughts requires innovative and sustainable solutions.
Apart from that, the turmoil of the Covid-19 pandemic which introduced the new normal era and the conflicts in Ukraine and the Middle East which triggered food and energy crises, have become obstacles to world progress over the last few years.
As 2023 approaches, new and previously known risks confront the world. These risks involve issues such as inflation, trade wars, social instability, and inter-state conflicts which are emerging again.
In addition, new risks include soaring debt levels, slowing economic growth, declining human development, rapid technological progress, and serious challenges related to climate change.
In the midst of the dynamics of the climate crisis and global uncertainty, the Indonesian government has stepped forward by issuing Green Sukuk since 2017 as a response to environmental challenges and sustainable development solutions.
The Indonesian government understands the urgency to face this problem and has committed to creating fiscal instruments that support sustainable development without harming the environment. In recent years, State Sukuk, especially Green Sukuk, have become a popular alternative investment choice in the financial market. Issuance of Green Sukuk by The Indonesian government not only involves utilizing funds for sustainable development but also becomes a pioneer in green financial innovation.
Why Green Sukuk?
The main reason behind the issuance of Green Sukuk is to support green projects and climate risk mitigation as a national priority. With great potential in the renewable energy sector such as geothermal and hydro, Indonesia is exploiting the potential of the Sukuk market to fund these projects. Since 2017, the issuance of Green Sukuk has been directed at funding projects that not only have a positive impact on the environment (such as renewable energy, energy efficiency, waste management, and climate resilience) but also provide social benefits that support the Sustainable Development Goals (SDGs). Reported by the Ministry of Finance in the Green Sukuk Allocation and Impact Report (2023), the majority of funds from Green Sukuk are allocated to support sustainable transportation projects with a proportion of around 32.39 percent. By following the SDGs Framework, the Indonesian government is committed to directing funds from Green Sukuk issuance for achieving sustainable development goals, including initiatives that improve people's quality of life and protect the environment. Thus, State Sukuk is not only a financial instrument, but also a means to realize the vision of sustainable development at the national level.
Green Sukuk Development Challenges and Strategic Steps
With various positive achievements, the issuance of Green Sukuk cannot be separated from a number of challenges. There are several challenges that according to the author need to be overcome. These challenges include increasing public awareness, the risks of Green Sukuk issuance on the global market and the dominance of conventional bonds. Increasing public awareness and understanding of sustainable financial instruments is one of the main challenges. To overcome this, the Indonesian government needs to take strategic steps that involve increasing public campaigns and wider education about the sustainability and benefits of Green Sukuk. In facing global economic dynamics, the government needs to emphasize the stability of economic growth to build investor confidence in Green Sukuk .
Sustained economic growth increases investor confidence and strengthens the government's ability to guarantee payment of the principal value of Green Sukuk investments. Economic stability is the main key in creating a positive investment climate. The challenge of Green Sukuk in the global market, especially in USD denominations, requires strategic steps such as the use of hedging instruments to protect the country's financial stability from exchange rate fluctuations.
The dominance of conventional bonds is also a serious challenge, and strategic steps involving diversification of sustainable financial instruments are needed. The dominance of conventional bonds is also a serious challenge, and strategic steps involving diversification of sustainable financial instruments are needed. Until now, the issuance of Green Sukuk by the Indonesian government in Domestic and global markets have reached a total of USD 6.9 billion or equivalent to IDR 107.9 trillion (Ministry of Finance, 2023).
However, the size of the Indonesian Green Sukuk market is still relatively small compared to the Green Bond market share in the global market which has reached USD 900 billion (S&P Global, 2023). In this case, it is important for the government to optimize the role of Green Sukuk instruments as a means of financing for environmentally friendly projects. The first reason is because Sukuk are issued based on underlying assets, different from conventional bonds which are interest based. Another fundamental difference lies in the use of contracts in the issuance of Sukuk, clarity of the financial structure regarding the transfer of ownership of assets or projects, as well as the distribution of risks and profits in accordance with sharia principles.
Therefore, the utilization of state assets and the development of green projects are key factors in ensuring the continuity of Green Sukuk as a legitimate source of financing and in accordance with Islamic principles. This shows that Sukuk have the potential to play a role in reducing the state's debt burden. The next strategic step , the government can encourage tax incentives or other expansive policies that support the growth of Green Sukuk, while reducing dependence on conventional financial instruments.
In addition, inviting the private sector to actively participate in financing green projects can be an effective solution. The government can create a supportive environment, including regulatory support to encourage the private sector to contribute more in financing sustainable projects. By implementing these steps holistically, Indonesia can overcome the challenges facing Green Sukuk and strengthen their role in supporting sustainable development.
Nisful Laila, Professor of Islamic Finance and Banking, Deputy Dean 2 Faculty of Economics and Business, Universitas Airlangga
