Coal as Stranded Assets: Potential Climate-related Transition Risk and Its Financial Impacts to Indonesia Banking Sector

An important issue to be discussed at the G20 Summit

Based on the Task Force on Climate-related Financial Disclosures (TCFD), transition risk is one of the financial risks that can arise from the process of adjusting to a low-carbon economy, both from policy/legal, technology, market, and reputation risks. One of the financial impacts of these risks is stranded assets, in which assets suffered devaluations and even became unusable. As a coal-producing country, this study can serve as a reminder for Indonesia which has the potential to lose if it does not consider the potential value of stranded assets in the future. Therefore, all parties, especially investors and financial institutions, must pay attention to this risk and be cautious in making investment decisions.

Coal contribution in the national energy mix is still high. With the power sector still being the largest domestic coal consumer, the government is reluctant to move away from coal-fired power plants (CFPPs). CFPPs are likely to become stranded assets due to more competitive investment costs from renewable energy power generation technology. With the existence of a merit order, the utilization of the CFPPs in the power system will decrease.

The government also looked at coal downstream industries as an attractive opportunity to increase the added value of coal. This industry is likely to engender stranded asset risks in the future since the economic viability of these projects is still in doubt with the need for various incentives from the government. The coal upstream/mining industry also has the potential to become stranded assets where the proven reserves must remain below the surface of the earth.

Stranded assets from the coal industries will directly have a negative impact on the financial sector which is involved in financing these projects. The global trend of moving away from coal financing projects is expected to increase the demand for domestic financing sources, including from the banking sector. This can further increase risks and impacts on the domestic financial system. Furthermore, if this risk is not properly managed, it could have a wider impact on financial stability through various transmission mechanisms.

In response to the emergence of climate-related risks, the Indonesian government has developed policies and regulations to foster sustainable finance. However, the implementation is still focused on efforts to take advantage of opportunities that arise. Meanwhile, efforts to mitigate risks are still low. Indonesia should begin to explore the lessons learned from the responses that have been made at the global level so as to improve the utilization of sustainable finance towards climate mitigation.

This study encourages recommendations for various actors to avoid the risk of coal project-stranded assets. The government should present clear signals in implementing climate policies so that economic actors can anticipate. The central bank and financial regulator should undertake thorough research such as assessment of climate-related financial risks, and disclose it by following the TCFD recommendations. Meanwhile, financial institutions/investors should manage investments and portfolios that are exposed to climate-related risks, as well as disclose this risk information to the public. This information is important to avoid incorrectly price or value assets, which are leading to a misallocation of capital.

The transition risks are not a single country issue, so it needs also to be mainstreamed through various means including through the international discussion forum. The momentum of the Indonesian presidency at the G20 Summit in 2022 and Indonesia’s Minister of Finance as co-chair of the Coalition of Finance Ministers for Climate Action in 2021-2023 can be used as a medium for discussion and raise the awareness of global countries towards this issue.