Climate change, the financial sector and the perception of risk are interconnected in a complex and interdependent relationship. Climate change poses significant risks to the financial sector, both through transition risks, such as changes in emissions policies, and physical risks, such as natural disasters.
These risks not only affect investment decisions, but also shape the direction of financial policies such as interest rates or credit allocation. Conversely, investment decisions also contribute to climate change, either through investments in clean energy that support sustainability or in carbon-intensive sectors that exacerbate environmental impacts.
In this context, risk perception plays a critical role, as how we view climate threats will determine investment priorities and their impact on sustainability.
In Indonesia, the banking sector is not exempt from this threat, with 41.2% of its portfolio exposed to climate change risks, particularly in the household, real estate, agriculture, and manufacturing sectors.
Bridging the Knowledge Gap
A survey conducted by the Center for Climate and Sustainable Finance at the University of Indonesia (CCSF UI) found a high level of awareness of climate change issues among sub-national development bank (SNDB) staff. Out of 4,345 respondents from 23 SNDBs, 95.45% recognized the existence of climate change and 59.2% acknowledged its significant impact on the profitability of their institutions.
However, the survey also found that half of the SNDBs were unfamiliar with terms such as carbon tax, carbon market, carbon trading and carbon exchange.
Dr. Sonny Mumbunan, lead researcher and coordinator of CCSF UI, highlighted the significant challenges, particularly in understanding these key concepts. "The challenge remains significant because they are hearing these terms for the first time," he said during the dissemination event of the Climate Risk Perception Survey and SNDB Capacity Development Needs (December 11).
He also emphasized the strategic role of SNDB in low-carbon development planning as part of climate change mitigation efforts. By strengthening governance, enhancing capacity, and aligning with national sustainability goals, SNDB has the potential to maintain regional economic stability while addressing the challenges of climate change.
Building a Climate Resilient Economy
In response to the survey results, Suzanty Sitorus, Executive Director of ViriyaENB, a philanthropic organization focused on climate change issues, praised SNDB employees' awareness of the impacts of climate change, noting that it was more advanced than in many other countries that still deny the issue.
However, she pointed out that the current instability of both the Indonesian and global economies requires the involvement of all parties in supporting climate change mitigation efforts. Suzanty also emphasized the importance of assessing the current financial landscape in order to strengthen the role of SNDB in addressing these challenges.
During the same discussion, Dr. Bahrudin, Senior Executive Analyst at OJK, emphasized that climate change is not only an institutional issue, but also has a far-reaching impact on society.
As a concrete step, the Indonesian government, through OJK, has published the Sustainable Finance Taxonomy to guide the classification of green finance and encourage banks to select viable projects for funding. In addition, OJK is developing climate risk management and scenario analysis to be implemented in all SNDBs next year.
These initiatives serve as a critical foundation to ensure that Indonesia's financial sector becomes more resilient to the impacts of climate change while promoting national economic sustainability.
