Indonesia, one of the world’s biggest greenhouse gas emitters, is turning to green finance markets to fund new development projects it promises will be both environmentally and socially friendly.

In issuing these ‘green’ and ‘sustainable’ bonds, Indonesia joins a growing number of developing countries seeking to appeal to ecologically and socially conscious international investors.

But critics question just how green and sustainable these bonds really are, highlighting concerns about greenwashing.

Indonesia, one of the world’s biggest greenhouse gas emitters, is turning to green finance markets to fund new development projects it promises will be both environmentally and socially friendly.

In February, the Indonesian government raked in $1.25 billion from issuing a “green” Islamic-compliant bond, or sukuk, hailed as the first sovereign green sukuk in the world. (The first corporate green sukuk was issued by a Malaysian company in July last year.) The funds raised will go to finance government projects that are both environmentally friendly and compliant with Islamic financing laws.

In the same month, the Tropical Landscapes Finance Facility (TLFF), a partnership between the U.N. Environment Programme, the World Agroforestry Centre, ADM Capital and BNP Paribas, issued a $95 million sustainability bond to finance rubber plantations in Sumatra and Indonesian Borneo, two regions that have been heavily damaged by annual forest fires and high levels of deforestation. This type of bond seeks to guarantee environmental protection and local community empowerment.

In issuing these bonds, Indonesia joins a growing number of developing countries seeking to appeal to ecologically and socially conscious international investors. But critics question just how green and sustainable these bonds really are.

Greenwashing?

Indonesia did not provide investors with a specific list of projects it was seeking to fund through the green sukuk. Luky Alfirman, head of the budget financing and risk management office at Indonesia’s Finance Ministry, said the proceeds from the bond issuance would be used to fund projects such as renewable energy, green tourism and waste management.

These projects must have stated outcomes for climate change mitigation or adaptation, and be screened against the Indonesian government’s Green Bond and Green Sukuk Framework.

The government of President Joko Widodo has made infrastructure development its top economic priority, and is turning to projects that also serve to mitigate against or adapt to climate change impacts in the country, Luky said.

Indonesia’s issuance of the green sukuk has been widely praised by analysts as a demonstration of the country’s commitment to environmental protection and transparency.

“Indonesia [has] done a good job with getting an excellent independent review and then committing to annual disclosure of the use of the proceeds,” Sean Kidney, chief executive of the Climate Bonds Initiative, told Mongabay in an email.

However some observers have raised concerns over the convoluted system to identify eligible projects, and have also noted the challenge of putting green financing into action.

The green sukuk issuance documents show that some of the projects to be funded through this framework will be based on forest management under the Reducing Emissions from Deforestation and Forest Degradation (REDD+) scheme and will not support or finance the development of new agricultural land through deforestation. But the Oslo-based Center for International Climate Research (Cicero) pointed out that “it might be possible that some projects include an element of deforestation.” Deforestation in Indonesia, largely driven by industrial agriculture, plantations and logging, remains high and a top contributor to the country’s carbon emissions.

Cicero has given Indonesia’s green sukuk a “medium green” rating, indicating that things are moving in the right direction, but aren’t “quite there yet.”

The opacity in implementing sustainable criteria is not uncommon in the global green bond market.

While Indonesia is the first Asian country to issue a sovereign dollar-denominated green bond (Poland issued the first ever sovereign green bond, in 2016), the sale of such notes from emerging economies has been on the rise. The second quarter of 2017 saw a record $32.2 billion of green bonds issued globally, according to ratings agency Moody’s. Issuances from emerging markets jumped to $9.2 billion from $2.3 billion year-on-year.

China, for example, accounts for over two-thirds of total emerging market green bonds and a fifth of the global tally. It issued $23 billion of green bonds in 2016, up from just $1 billion in 2015, according to the Climate Bonds Initiative.

However, China is also the world’s biggest carbon emitter.

In 2016, Swiss bank Lombard Odier’s Global Climate Bond fund passed up on buying Poland’s green bond, citing concerns about issuer responsibility and so-called greenwashing. This is when an issuer promotes green initiatives but operates in a way that damages the environment.

Assaad Razzouk, a board member of the Climate Markets & Investment Association (CMIA), said that green bonds, which account for 0.4 percent of the $100 trillion global bond market, were being used as a mask for environmental destruction and did more harm than good.

“Countries and companies don’t have to turn responsible or green at all to issue a ‘green’ bond, and that’s just wrong,” he wrote in an op-ed in March.

“Once a bond is issued, there are neither penalties if companies or countries subsequently break their green promises, nor robust ways of measuring and verifying whether these are kept. There isn’t even a consistent definition of what is ‘green’, which suits the market very well: Everyone from oil companies to banks are piling in with questionable deals,” Razzouk added.

A Moody’s analysis found that about $14 billion of last year’s green-labeled bond volume did not conform to the Climate Bond Initiative’s criteria. Debt that didn’t make the cut included notes where proceeds were funneled to such controversial projects as so-called clean coal.

Keeping it local

The other green debt paper issued in February, the TLFF sustainability bond, seeks to avoid that problem. It will fund PT Royal Lestari Utama (RLU), an Indonesian joint venture between French tire manufacturer Michelin and Indonesian petrochemical company Barito Pacific Group, to invest in the production of natural rubber in Jambi and East Kalimantan provinces.

The project is expected to see 450 square kilometers (174 square miles) of RLU’s total concessions of 880 square kilometers (340 square miles) set aside for community livelihoods and conservation.

“The project incorporates extensive social and environmental objectives and safeguards. Planted areas will serve as a buffer zone to protect a threatened national park from encroachment,” the TLFF said in a press release in February.

It also said the transaction was the first corporate sustainability bond in Asia and the first sustainability bond in the Association of Southeast Asian Nations (Asean).

Indonesian Environment and Forestry Minister Siti Nurbaya Bakar welcomed the bond issuance, saying, “We highly support this positive drive from the private sector using an investment structure like the TLFF, which not only boosts economic development, but also improves much needed skills in the longer term.”

Gabriela Flores, a senior associate for the U.N.-REDD Programme, which oversees the TLFF, acknowledged the environmental and social integrity challenges that sustainability bonds faced. However, she said the rubber plantation project had already been screened against international sustainability bond guidelines.

She said the proper adoption of environmental and social criteria, standards and guidelines would help guard against greenwashing.

The rubber plantation project will have to consult with relevant communities and stakeholders, including forest dwelling communities. In the implementation, it will also integrate key sustainability objectives, such as pollution reduction, biodiversity protection, peatland restoration and rehabilitation, improving rural livelihoods, landscape protection, emissions reductions, and sustainable energy access.

“This project aims to demonstrate a viable model of socially inclusive production and climate resilient employment for local people inside a blended conservation and commercially productive landscape,” Flores said. “This financing model may be applicable and scalable at the national level to unlock capital from institutional investors and other private finance institutions for achieving development and climate goals.”

Vigeo Eiris, a research firm, has validated the TLFF bonds as “sustainability notes” with positive contributions to sustainable development.

Razzouk, who is also CEO of Sindicatum Renewables, a Singapore-based clean-energy project developer, said greenwashing could be avoided altogether if all bonds incorporated green or sustainable requirements.

“To achieve the necessary impact, all bonds should be green and what we should be developing are solutions for ensuring this is gradually the case,” he said. “To get there, green bonds should be phased-out so that the fig leaf investors, issuers and banks are hiding behind to pretend they are making a difference is taken away.”

Banner image of native forest and an acacia plantation in Riau, Indonesia, by Rhett A. Butler/Mongabay.

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