Journal of Management Information and Decision Sciences (Print ISSN: 1524-7252; Online ISSN: 1532-5806)


Regulation and Implementation of Sustainable Finance: A Challenge to Indonesian Banks

Author(s): Lastuti Abubakar, Tri Handayani, C. Sukmadilaga

Indonesian banking has become one of the frontlines in supporting Indonesia's commitment to realize sustainable development goals. Banks must gradually adopt and internalize the 8 principles of sustainable finance as stipulated in Regulation of the Indonesia Financial Service Authority (POJK) No. 51/2017 on Sustainable Finance in their business activities. As a result, it is mandatory that banks run their business not in a ‘business as usual’ manner, but rather as part of implementing sustainable finance. One of the challenges for banks in realizing the long-term plans (2020-2024) is the integration of social and environmental risk aspects into their business processes. Therefore, one of the banking policies that must be carefully regulated and managed is the management of social and environmental risk aspects. In addition, to realize sustainable finance, banks should implement a principle of prudence through the aspect of social and environmental risk governance. This being the case, the Banks must make strategic steps to integrate social and environmental aspects into the activities and services/products offered. The result shows that the applicable regulations that provide and relate to sustainable finance in Indonesia are distributed in several rules and involve the government, corporations and society. Cooperation between banking and the government is required in order to ensure priority industries comply with all regulations relating to environmental preservation. Meanwhile, considering that development of regulations related to the environment is highly dynamic, banks are required to have flexible policies to be able to keep up with the dynamic in the community while still complying with the principles of sustainable finance. Regulatory synchronization is still needed considering the current banking provisions require an Environmental Impact Analysis (AMDAL) for industries with a high risk to the environment. Meanwhile, a recent regulation on business permits stipulated in Law No. 11/2020 on Job Creation applies a risk-based regulatory approach that must be translated by banks into more realistic guidelines. In addition, the Bank needs a corporate role to support the implementation of sustainable principles both as creditors and debtors. Corporate regulations in Indonesia are only limited to requiring corporate social responsibilities for types of business related to natural resource management. Therefore, it is necessary to strengthen regulations that encourage corporations to apply sustainable principles. Currently, the Financial Services Authority has submitted a draft of a plan for financial development/investment guidelines that will facilitate financial service institutions, especially banks, to conduct a feasibility analysis of funding/investment in sustainable priority economic sectors.

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