Risk management
The transport sector also achieved the second-highest coverage score of all the sectors for risk management. The majority of the assessed companies provided some description of their organization’s process for identifying and managing climate-related risks. The transport sector was the best performer in terms of the quality of risk management disclosures. The inclusion of a climate-related risk identification and assessment process was commonly adopted. However, the quality and details included varied considerably between the companies.
Companies within the transport sector generally obtained good results because they clearly outlined their risk identification and management, and the application of their materiality processes. Nevertheless, these processes were not always linked with the overall risk management process. Climate-related risks and opportunities tended to have a specific management process. Only half of the companies which had an optimal quality score for the process of assessment or management of their climate-related matters, also obtained an optimal quality score for the integration of this process into their overall risk management.
Top-performing companies mostly described an integrated risk management framework where processes for climate risks were included in the overall risk management process. Also, process ownership and responsibilities to identify and then manage the climate-related matters were well explained across all the different levels of the business (such as at the business unit level, management level and board level). In their climate-related risks assessment and management process, some companies valued the implication of internal stakeholders (including identification, updating and validation of risks and impacts) across all departments of the company.
Targets and metrics
The transport sector obtained the highest coverage score for targets and metrics recommendations of all the sectors, with companies scoring relatively similar to each other.
Just under half of the assessed companies scored above 60% in terms of the quality of their disclosures, meaning the transport sector obtained the best quality score across all the sectors for targets and metrics. In addition to detailed information on their Scope 1, 2 and 3 greenhouse gas (GHG) emissions, companies in the transport sector disclosed more information about their climate-related KPIs and the associated targets, such as carbon emission intensity indicators (e.g., for car producers: gCO2/km) or consumption indicators (e.g., for transporters: total fuel consumption).
Despite a satisfactory coverage score for the recommendation on Scope 1, 2 and 3 emissions, only 19% of companies provided consistent historical information of their GHG emissions, and the methodology or boundaries used were rarely consistently explained.
Most of the companies from the best-performing markets disclosed targets with time frames and base year for all their key climate-related indicators. For example, best performers disclosed:
Average carbon intensity indicator for cars (gCO2/km)
- Carbon dioxide (CO2) emissions per passenger and per kilometer
- Total fuel consumption with fuel efficiency indicators
The best performers also reported on the evolution of these indicators, which enabled historical trend analysis.
How Bonds are Issued in Indonesia
Green bond issuances generally follow general process of bonds issuance with additional steps specifically required for green bonds, such as:
1. Pre-issuance process: Green asset strategy development
The step includes management's development of a green asset strategy for the entity, with its finance team evaluating the appropriate funding sources. The entity's green bond framework must be developed, which defines the eligibility criteria for projects/assets (use of proceeds), project selection and evaluation, management of proceeds, and reporting procedures.
To develop the framework, the entity should seek guidance from existing bond standards, such as Green Bond Principles (GBP), Climate Bond Standards (CBS), ASEAN Green Bond Standards, or POJK 60 provisions. The policies, procedures, and internal control for green bond issuance shall be developed based on the green bond framework.
2. Pre-issuance process: External reviews
To provide a level of comfort for issuers, external review before the bond issuance is required to ensure whether the green bond framework is consistent with the adopted green bond standard. Types of pre-issuance external reviews include third-party assurance or second party opinions.
3. Green bond issuance
The issuance process includes the development of green bond prospectus, which is a public disclosure detailing bonds terms, such as tenure, target proceeds, coupon, currency, prepayment penalty clause, etc. Parties involved in the green bond issuance processes includes all parties in the general bond issuance such as underwriter, arranger, legal advisor, auditor, credit ranking agencies, trustee, and notary, and additional external reviewer for green bonds.
4. Post-issuance process: Management of Proceeds
The proceeds management requires earmarking and disbursement for the nominated project. Green bond net proceeds could be tracked and managed through a separate account, sub-account or virtual account, and requires monitoring. This step allows the proper tracking and management of unallocated proceeds from the bond issuance.
5. Post-issuance process: Performance reporting
Annual or periodic disclosures to investors about bond performance are carried out to publish the details on financed projects, and their environmental and/or social benefits and management of proceeds. The issuers are also recommended to support the report with an external review or assurance to assess the proceed allocation and impact of the bond proceed.
The Way to Drive Sustainable Investment
As businesses respond to the growing needs for sustainability practices, green bonds serve as an alternative source of financing to help achieve companies’ net-zero target and long-term business sustainability. Companies should, however, consider the following general consequences when considering green bonds issuance:
- Possible involvement of advisor(s) to conduct a pre-feasibility assessment.
- Develop green bond framework and asset strategy to demonstrate the integrity of the greenness that meets international green bond standards
- Involvement of independent reviewer to assess green bonds alignment with framework, and external parties during the issuance process
- Management of proceeds and performance reporting to investors and stakeholders.
There are also benefits for issuers when issuing green bonds. Green bonds could attract diversified investor base, especially those with sustainability-related mandates, such as asset managers or pension funds. For investors, holding green bonds can help boost its ESG scores. More demand for green bonds from investors could lead to a larger investor base.
The GoI has started to introduce more initiatives to achieve the goals of 2015 Paris Agreement, starting with emissions reduction target for specific sectors by 2030 established in Nationally Determined Contributions (NDC), and targets for achieving carbon neutral by 2060 or sooner as stated in Long Term Strategy for Low Carbon and Climate Resilience (LTS-LCCR) plan. Consequently, more companies are becoming aware of the need to comply with climate change solutions including:
- Mainstreaming sustainability targets and strategies into overall business plan
- Developing green financing framework to increase sustainable financing
- Performance measurement (i.e., performance targets and achievements monitoring).
- Sustainability reporting mandated by regulators, investors and creditors.
- Shifting investment to reduce environmental impact of investors’ portfolio
