Malaysia, Indonesia's journey in pushing for green finance

GREEN financing has emerged as a crucial tool to combat climate change and promote sustainable development.

However, implementing it in Southeast Asian nations like Malaysia and Indonesia has its challenges. While both countries have made strides in promoting sustainable finance, regulatory hurdles, limited awareness, and a lack of standardised definitions hinder progress.

What is green financing?

Green financing is essential for funding projects that mitigate climate change, from renewable energy initiatives to sustainable infrastructure.

Several international policies guide and encourage green financing. The Paris Agreement aims to mobilise financial resources for a low-carbon, climate-resilient economy. The UN SDGs provide a framework for green financing policies that promote sustainable development.

The EU Sustainable Finance Action Plan encourages sustainable investment within the EU through measures like a green bond standard and a sustainable finance label.

The G20 Green Finance Study Group focuses on developing green finance policies and has created voluntary guidelines for green bond issuers and investors.

The International Organization of Securities Commissions develops standards for securities markets, including recommendations for green bond issuers to ensure transparency.

Progress and challenges in Malaysia and Indonesia

Malaysia's government recognises the importance of sustainable development and has taken steps to promote green financing.

The Green Technology Financing Scheme, introduced in 2010, funds green technology projects.

Some notable projects include increasing steel manufacturing efficiency, adding biogas plants to effluent treatment plants, producing biodegradable food packaging, building solar power plants, and more.

In 2014, the Securities Commission Malaysia introduced the Sustainable and Responsible Investment Sukuk framework, enabling the issuance of green bonds or ‘Sukuk', a Sharia-compliant bond.

In Indonesia, green financing is more established, and the country has a well-developed ecosystem. The government has implemented initiatives like issuing green bonds and tax incentives for green investments.

The goal is to fund projects that reduce carbon emissions, adapt to climate change, and protect biodiversity. Indonesia has successfully raised billions through green bonds and sukuk since 2018.

This funding has supported renewable energy (solar, wind, geothermal), green transportation (electric vehicles, public transit), sustainable forestry, and waste management. These investments help Indonesia achieve its climate and sustainability goals.

In 2018, Indonesia's Financial Services Authority introduced green financing regulations, requiring financial institutions to consider environmental, social, and governance (ESG) factors in lending.

Indonesia's commitment to the Paris Agreement is reflected in its promotion of green financing for sustainable development and green infrastructure.

Indonesia's Geothermal Resource Risk Mitigation project, backed by millions from the Green Climate Fund, aims to boost geothermal energy development.

By mitigating risks and providing funding for exploration, the project expects to avoid significant CO2 emissions and meet Indonesia's energy needs. This initiative showcases the potential of green finance in unlocking renewable energy resources and driving sustainable development.

Despite their efforts, both Malaysia and Indonesia encounter significant challenges in implementing green financing policies and regulations.

In Malaysia, a major obstacle is the absence of clear definitions regarding what constitutes "green" projects or investments.

This lack of clarity can obstruct the effective execution of green financing initiatives.

Moreover, issues such as an insufficiently defined scope of the green financing mechanism, difficulties in enforcement, and a lack of alignment with other environmental regulations serve as additional impediments.

Indonesia faces similar challenges, including the absence of a comprehensive regulatory framework, unclear definitions, and the necessity for unified regulations to combat greenwashing.

The need for established benchmarks further complicates the formulation of adequate regulations for green financing in Indonesia.

A well-defined regulatory framework for green financing is essential to enhance clarity for investors and financial institutions.

Developing the green financing market is also necessary for clear definitions and standards. Furthermore, limited public awareness and understanding of green financing may restrict the demand for green financial products and services.

Despite facing several challenges, Indonesia has made notable progress in promoting green financing, mainly due to the government's commitment to sustainable finance.

However, additional efforts are required to tackle the remaining obstacles and accelerate market growth. This includes developing a more comprehensive regulatory framework, increasing public awareness, and enhancing transparency in reporting.

Malaysia, which is relatively new to green financing, is still developing regulatory mechanisms. The need for robust frameworks and enforcement poses significant challenges.

The Malaysian government should enhance its regulatory frameworks by establishing clear standards for market participants to improve the situation. It is essential to raise public awareness and educate individuals about green financing. Furthermore, it is crucial to encourage greater transparency and reporting by financial institutions regarding their green financing activities.

Strengthening monitoring and enforcement mechanisms, including imposing penalties for non-compliance, is also necessary. Establishing a dedicated regulatory body for green financing could be beneficial.

Fostering stakeholder collaboration is vital to promoting market growth and addressing challenges. By implementing these measures, Malaysia can create a more effective regulatory environment for green financing, supporting the transition to a sustainable economy.

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Siti Hafsyah Idris is an academic and researcher in environmental law, including biodiversity and climate change at the Faculty of Law, Universiti Teknologi MARA, Malaysia.

Iman Prihandono is an academic and researcher in international law and international human rights law at the Faculty of Law, Airlangga University, Indonesia.