Hidden Dangers of Indonesian Biofuels: The Key Role of Financial Institutions
The Indonesian government has committed to using biofuels as an alternative fuel source in order to reduce its greenhouse gas (GHG) footprint and meet its low carbon development target. However, using biofuel as an alternative fuel source has potentially negative environmental impacts if biofuel is sourced from Crude Palm Oil (CPO) produced by non-deforestation, peat or exploitation (NDPE) compliant businesses. Financial institutions therefore hold the key to preventing this from happening, by ensuring strict sustainability commitments from their debtors.
Following the implementation of the mandatory use of B20 fuel in 2018 (a biofuel blend composed of 80:20 fossil fuel to CPO), the Indonesian government plans to increase this ratio to 50:50 (B50 fuel) by the end of 2020. This will partly reduce dependency on fossil fuel, whilst also absorbing the impact of a drop in the export volume of palm oil, with the intention of benefitting both the economy and the environment.
This policy carries the inherent risk of palm oil plantation expansion in order to meet biofuel demand. This could trigger massive forest and land clearance threatening the environment, local communities and food sovereignty.
Financial institutions hold the key to helping Indonesia achieve both their GHG reduction targets and low carbon development goals. This can be achieved by imposing strict sustainability measures and only lending money to businesses who have adopted and implemented sustainability principles (e.g. NDPE policy), particularly on high risk businesses who have the potential to cause harm to the environmental and local communities such as palm oil plantations. The assessment of potential debtor’s sustainability track record should be critical in the decision-making process of an investment.