Tailoring innovative financial solutions for the transition to net zero

McKinsey talked to Ahmad Siddik Badruddin, chief risk officer at Bank Mandiri, about the role that banks can play in aiding Asia’s sustainability transition. They also discussed the challenges around regulatory risk and mobilizing capital and resources into sustainable finance.

McKinsey: What role does the banking sector play in driving the region’s transition to net zero?

Ahmad Siddik Badruddin: The banking sector plays a critical role in encouraging clients to run their businesses responsibly and in promoting sustainable finance practices. We support our clients by providing financial solutions that can help them to gradually decarbonize. We also look deeper at clients’ supply chains, and tailor financial solutions to help them transition into low-carbon businesses.

As of 2021, green bonds were the most developed green instruments, with broad acceptance from the global investor base. Globally, volume of green bond and loan issuance has sharply risen from $71 billion in 2018 to $269.5 billion in 2020, and $5 billion in 2018 to $29.4 billion in 2020 for ASEAN cumulative issuance. But there’s still a big financing gap. There’s a lot more cooperation required between governments and banks: we all need to work together to fill the funding gap.

McKinsey: One of the challenges is around regulatory risk. What do you feel needs to happen in this area?

Ahmad Siddik Badruddin: To achieve net zero, financial institutions need to work very closely with government and regulators to set up policies that align with climate and sustainability goals. First, the government needs to provide guideline incentives and disincentives to boost interest and demand for sustainable-finance instruments. For example, there’s a basic need to set up a carbon market to facilitate the trading of carbon allowances and offsets. Regulators also need to provide the appropriate framework to motivate increased interest and participation from banks and other financial institutions.

In addition, the government and government-supported entities can work together with financial institutions such as the World Bank or the Asian Development Bank (ADB) to develop a financing platform. How do we de-risk green projects with guaranteed mechanisms, credit enhancement, or insurance? We need to come together quickly with all stakeholders to set up the right infrastructure policies, regulations, standards, and incentives.

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McKinsey: What is the role of a leading Indonesian institution like Bank Mandiri in promoting sustainable finance to help bridge this significant funding gap?

Ahmad Siddik Badruddin: We are highly committed to developing and promoting sustainable-finance practices, including efforts to help achieve a low-carbon economy. This commitment translates into our sustainable-finance framework and strategy, which consists of three pillars—the sustainable-banking pillar, the sustainable-operations pillar, and the sustainable-CSR and financial-inclusion pillar.

For the sustainable-banking pillar, we have strict criteria for our sustainable credit portfolio. In the 2nd quarter of 2022, we already had IDR 226 billion or 25.4 percent of our total loan portfolio that qualified as sustainable loans, some of which was in green sectors and some in the micro, small, and medium enterprise (MSME) segment. We also have initiatives to implement sustainable financing in the retail banking segment—for example, auto loans for electric vehicles, subsidized mortgage loans for affordable housing projects, and government-subsidized productive micro loans.

On the funding side, Bank Mandiri successfully issued its first sustainable bond in April 2021, with an issuance size of $300 million. This bond issue has been recognized as the best sustainability bond by The Asset in that year. In the first quarter of 2022, Bank Mandiri conducted two ESG repo transactions, totaling USD 500 Mn, the first ESG repo in Indonesia. We also actively support our corporate banking clients with high carbon footprints, such as those in the coal industry, to help them transition into green operations and businesses. We prioritize clients, existing or potential, who have transition strategies and action plans in the context of climate-related risk management. We will continue to develop products and services that align with sustainable finance, such as Sustainability-Linked Loan (SLL) and Transition Loans, to offer to potential clients to transition to green operations or adapt to climate risk. On the regulatory side, we believe that there will be opportunities to align our portfolio to the new green taxonomy and help clients meet these criteria.

For our sustainable-operations pillar, we continue to minimize our own carbon footprint by increasing the use of efficient, renewable energy and lighting, and developing eco-friendly offices. So, whenever we build new offices, we make sure that they qualify to be recognized as green buildings. With the launch of digital super app Livin’ and digital super platform Kopra, Bank Mandiri not only supercharges its digital banking operations but also helps minimize carbon footprint in its clients’ activities and Bank Mandiri’s own operations.

And for the sustainable-CSR and financial-inclusion pillar, we are focused on community empowerment programs and expanding our financial-inclusion programs.

McKinsey: What are the challenges for mobilizing capital and resources into sustainable finance?

Ahmad Siddik Badruddin: I believe there are three main challenges. The first one definitely would be the financing gap—the transition into a lower-carbon economy requires significant capital for the development of the green infrastructure and ecosystems. By the ADB estimation, Asian developing countries need around $1.7 trillion per year to support climate-resilient infrastructure. Indonesia alone requires around $74 billion per year, with an annual financing gap of around $51 billion.

The second challenge is the lack of investment-ready projects, where green projects typically require new technology, large capital, and long-term financing—special structured finance is really needed here, which is usually more costly and sometimes less viable than the traditional forms of finance. Many of the green finance projects are also viewed as not bankable due to the lack of quality in project preparation, structuring, and planning. So, these factors contribute to the perception of the higher risk profile of the projects.

The third challenge is regulatory and policy uncertainty. Regulations and policies related to green finance are still in the early development phase and have not been standardized in regions and across agencies. This uncertainty can increase financing risk, resulting in questions on project viability, and also potential lack of interest from the investor side. The reporting and disclosure standards among countries vary widely, and there is no standard regulation that has been set among regions. This results in inconsistency of data disclosure, which makes it difficult for investors to make objective comparable assessments between countries and regions.

So, I think some of the things that we can do to overcome the challenges is for private capital and investment to be supported by the appropriate incentives or policies from government, and technical assistance from development financial institutions. We need to understand how we can overcome these top three challenges, otherwise progress will be slow and difficult.

This interview is part of an ongoing series on Shapers of Sustainability, where we convene leaders on sustainability to discuss challenges and opportunities in the Asia-Pacific region’s transition to net-zero.

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