World leaders convene at the G20 Summit in Bali, Indonesia in November 2022. (Photo: Laily Rachev / Press Secretariat of Indonesia).

Going Beyond Commitments: Learning Sustainability Financing from the G20


Maria Monica Wihardja provides an overview of how Indonesia spearheaded the G20 Sustainability Financing initiatives and how ASEAN can learn from that experience.

The G20 Bali Leaders’ Declaration was not short on commitments and pledges to create new global funds to address the world’s multiple short-term and structural sustainability challenges today. These commitments include the establishment of the new Pandemic Fund and the new Resilience and Sustainability Trust. Recognising the heightened debt vulnerabilities among many emerging markets and developing economies (EMDE) due to the COVID-19 pandemic while facing pressing needs to invest in climate mitigation and adaptation, the G20 also came up with a Common Framework for Debt Treatment beyond the Debt Service Suspension Initiative to help low-income and other vulnerable countries to restructure their debts. 

Sustainable finance is recognised as key to supporting EMDE towards a green, resilient, and inclusive development (GRID). Under the G20 Sustainable Finance Working Group, progress was made in developing and adopting standards and taxonomies for identifying ‘sustainable’ activities. Indonesia also launched the Energy Transition Mechanism to help EMDEs like Indonesia, which rely heavily on fossil fuels to transition to renewable energy. 

These commitments are made in the context where we are not in normal times, as Kharas and Rivard alluded to in their recent report “Debt, Creditworthiness, and Climate: A New Development Dilemma”. For many countries, this means deteriorating creditworthiness, rising costs of financing, high fiscal deficits, low economic growth, and high inflation due to skyrocketing food, energy, and fertiliser prices. Moreover, many EMDEs are facing an entrenched development-dilemma conundrum where they must choose between protecting their vulnerable citizens and micro and small enterprises from the impacts of high inflation, job losses, and high cost of financing, versus investing in the transition to green energy. Investing in sustainability is still perceived as a luxury instead of a top development priority. 

At the same time, the world is facing climate challenges that make an urgent call for every stakeholder globally to play its role in addressing them. The proliferation of global funds and other commitments to scale up sustainable financing is recognition that all countries need to work together to address the tragedy of our global commons. 

The statistics are telling. As cited by Kharas and Rivard, one quarter of the global greenhouse gas emissions come from developing countries without an investment grade credit rating, which means the cost of financing is very high (as the risks are higher for investors to invest in these countries and hence, they impose higher interest rates). Moreover, almost all advanced economies can borrow from the global capital markets at rates below 5%, while only six out of 52 EMDEs can borrow at this rate. However, without these countries transitioning to green energy, the global target to limit temperature increase below 1.5 degrees remains elusive. 

This means that without access to cheaper capital, such as non-concessional and concessional official financing by international financial institutions (IFI), many EMDEs are not incentivised to invest in decarbonising their economies. This explains why the various sustainable financing commitments at the G20 provide not only access to cheaper capital but also technical assistance and capacity-building to help countries to plan their transition strategies and manage their transitional risks.

What can ASEAN learn from various G20 initiatives so far to scale up sustainability financing and encourage countries to take climate action?

First, addressing sustainability issues needs long-term and sustained strategic investments in the scale of trillions, and not billions, of dollars. Currently, most pledges are still in the billions, such as the US$100 billion Climate Fund and the US$100 billion Resilience and Sustainability Trust, or the US$1.4 billion-pledged Pandemic Fund. 

As a recent report by Basri and Riefky, titled “Ensuring Inclusive, Affordable, and Smooth Climate Transition in Indonesia”, argues, a primary reason for the discrepancy between agreement and inaction is “a difference of views on who should do what”. In the spirit of ‘gotong royong’ (the idea of community self-help), the High-Level Advisory Group on Sustainable and Inclusive Recovery and Growth (HLAG) – an international panel of development experts – recommends the division of labour on who-should-do-what to scale up sustainability financing. This includes the role of multilateral development banks (MDBs) and the International Monetary Fund (IMF) to increase their provision of technical expertise and financial assistance, in particular through concessional financing to de-risk investments with low risk-adjusted returns. It also urges governments to bolster domestic resource mobilisation, including through carbon taxes, phasing out from ‘dirty sector’ subsidies, fossil fuel excise, plastic excise, and green tax incentives. 

Blended finance, which adopts the spirit of ‘gotong royong’, has gained popularity among the G20 countries. It is a structuring approach that brings various actors together, including private philanthropists and impact investors, to invest in projects while achieving their own goals – whether financial, social or environmental, or a combination. 

Addressing sustainability issues needs long-term and sustained strategic investments. (Photo: Shutterstock).

Second, commitment alone is insufficient. Instead, we have to explore the ‘how to do so’, especially in weathering transitional risks, as Basri and Riefky argue in their report. The HLAG recommends that each country must design their own institutional framework arrangements to fit specific country contexts and needs. There is no one-size-fits-all solution. Recognising the domestic political economy of a green energy transition is critical in this regard. 

For countries facing the development-dilemma conundrum, the energy transition agenda must be directly linked to the development target and the country’s priorities. Since political cycles are usually short (except in authoritarian governments), 10 years at the maximum, compared to the maturity of green projects and investments that could span over 30 years, policymakers could start with low-hanging fruits to gain political support in the short run to sustain the green transition plan over the long term. Institutional, regulatory, bureaucratic, and governance weaknesses should be considered when governments plan their energy transitions, especially in their short-term plans. Identifying losers and winners, and prioritising policies and sequencing reforms, will help countries to weather the transitional risks. Lastly, public communication, awareness, and support for climate action could help ease pressures on governments and policy makers. 

Third, global level reforms are needed to enable the big investment push towards GRID. As highlighted by Kharas and Rivard, the major IFI could change their methodology in how they assess the creditworthiness of countries, which is used by potential investors to make investment decisions. Since climate vulnerability will increase financial risks and stifle financial stability, the methodology could consider climate resilience and vulnerability in assessing creditworthiness to incentivise countries to invest in climate actions. Countries that refrain from investing in climate mitigation and adaptation will find it more difficult to improve their credit ratings. Equally important, Kharas and Rivard noted that the key to success in a big investment push scenario is improving investment climate and strengthening institutions. 

Without sound governance and institutions, EMDEs will find it difficult to credibly and transparently execute the green investments that they commit to undertake. A ‘just transition’ partnership, involving neutral partners such as MDBs, is a starting point. The Just Energy Transition Partnership (JETP) in Indonesia could help Indonesia to deliver its ambitious goal in climate action while achieving GRID. However, it needs the active involvement of relevant domestic stakeholders to succeed, including regulatory reform strategy and regulatory sandboxing. 

Indonesia wants to sustain the momentum of the G20 Summit last year for its ASEAN Chairmanship this year. Learning from the G20 sustainability financing initiatives, ASEAN could focus on first, the ‘who-should-do-what’ when it comes to working together to achieve regional and global climate action targets; second, the ‘how-to-do-so’ when it comes to individual-country implementations; and third, the ‘big-investment-push’ narrative when EMDEs in ASEAN are faced with a development dilemma. 

Editor’s Note:
This is an adapted version of an article from ASEANFocus Issue 1/2023 published in March 2023. Download the full issue here.

Maria Monica Wihardja is an Economist and a Visiting Fellow in the Media, Technology and Society Programme, the Regional Economic Studies Programme and the Indonesia Studies Programme at ISEAS – Yusof Ishak Institute.