The Financial Services Authority (OJK) of Indonesia has issued a guide for banks to conduct climate risk stress tests (CRST) from 2026 onwards. The CRST is a bottom-up approach that aims to assess the resilience of banks to various climate scenarios and their impact on the financial system.
What is CRST and why is it important?
CRST is a tool to measure the potential losses and capital adequacy of banks under different climate scenarios, such as a low-carbon transition or a high-temperature increase. The CRST will help banks identify and manage their exposure to climate-related financial risks, such as physical risks from extreme weather events and transition risks from policy changes or technological innovations.
Climate change poses a systemic risk to the Indonesian economy, as it affects various sectors such as agriculture, forestry, energy, tourism, and infrastructure. According to a study by the Asian Development Bank, Indonesia could lose up to 6.5% of its GDP by 2100 due to climate change. Therefore, it is crucial for banks to factor in climate risks in their business strategies and risk management frameworks.
How will CRST be implemented?
The OJK has published a guide for banks to conduct CRST in 2023 as an initial phase. The guide provides the methodology, data requirements, scenarios, and reporting formats for the CRST. The OJK has also formed a task force on climate-related financial risks, which consists of 34 banks that account for 90% of the banking sector’s assets. These banks will participate in the CRST pilot project in 2023 and provide feedback to the OJK.
The CRST will be conducted annually from 2026 onwards, and will cover all banks in Indonesia. The OJK will use the results of the CRST to evaluate the soundness and resilience of individual banks and the banking sector as a whole. The OJK will also use the CRST as a basis for formulating policies and regulations on climate risk and sustainable finance.
What are the benefits and challenges of CRST?
The CRST will provide several benefits for banks and the financial system, such as:
- Enhancing the awareness and understanding of climate risks and their implications for banks’ performance and stability.
- Improving the disclosure and transparency of climate risks and opportunities for banks and their stakeholders.
- Encouraging the integration of climate risk and sustainability factors into banks’ governance, strategy, risk management, and product development.
- Promoting the alignment of banks’ activities with the national and global climate goals and commitments.
However, the CRST also faces some challenges and limitations, such as:
- The availability and quality of data on climate risks and exposures, especially for long-term horizons and granular levels.
- The uncertainty and complexity of climate scenarios and models, which require constant review and validation.
- The coordination and collaboration among regulators, banks, and other stakeholders, such as the central bank, the ministry of finance, and the national planning agency.
How does Indonesia compare with other countries?
Indonesia is one of the first countries in Southeast Asia to introduce CRST for banks, following the footsteps of developed countries such as the UK, France, and Canada. The CRST is also in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which is a global initiative to improve the reporting and management of climate risks by financial institutions and corporations.
However, Indonesia still lags behind some of its peers in terms of the scope and depth of CRST. For instance, India has conducted a survey on climate risk and sustainable finance for 34 leading banks in 2022, which covers not only climate risks but also environmental, social, and governance (ESG) aspects. India also plans to conduct a comprehensive CRST for banks and non-bank financial institutions in 2024.
Moreover, Indonesia has not yet set a clear target or roadmap for achieving carbon neutrality, unlike some of its neighbors such as Malaysia, Singapore, and the Philippines. Indonesia is the fifth-largest emitter of greenhouse gases in the world, and has pledged to reduce its emissions by 29% by 2030 and 41% by 2045. However, these targets are conditional on international support and cooperation, and may not be sufficient to limit the global warming to 1.5°C above pre-industrial levels.
Therefore, Indonesia needs to step up its efforts and ambition to address the climate crisis and transition to a low-carbon and resilient economy. The CRST is a positive and proactive move by the OJK, but it should be complemented by other measures and policies to support the green and sustainable development of the country.
