December 7, 2023
JAKARTA – Impact investing is becoming progressively more important in Indonesia, where it has become part of the means to overcome complex issues related to climate change, equitable development and social welfare, which requires innovation. Referring to the Sustainable Development Goals (SDGs), these problems cannot be solved through political means alone. Innovation and finding the right approach to overcome problems requires attention, seriousness and collaboration from all stakeholders to create a conducive ecosystem.
The basic principle of impact investing is an investment activity that aims to generate returns and maximize its social and environmental impact. Impact investing takes a different approach from traditional investing as it focuses on making investments that also make measurable social and environmental changes, especially on the operational side.
Based on data from the Global Impact Investing Network (GIIN), the world’s market size of impact investing assets under management (AUM) was estimated at US$1.6 quadrillion in 2022. Meanwhile, according to AusAid, Indonesia has the most active market for impact investing in the Southeast Asia region in terms of the number of impact deals. With $1.44 billion investment through 131 impact deals in 2020-2022, the country accounts for 20 percent of the total impact capital deployed in the region. Most of the investments had a ticket size between $1 million-$5 million, of which 60 percent of the deals were below $5 million and 88 percent were led by private impact investors. The Indo-Pacific Impact Fund (IIF) estimated that Indonesia alone needs an estimated $1 trillion of investment to fulfill its SDG gap by 2030.
Hence, with such a huge market size, Indonesia is expected to leverage this potential to upsurge impact investments in the country. This prospective impact funding could have major implications for issues such as poverty alleviation, access to health care, social inequality, environmental protection, sustainable cities and housing, quality education, female inclusion, climate innovation solutions and sustainable micro, small and medium enterprise (MSME) financing. Impact investing is also essential to addressing the challenges of climate change because impact investors play an active role in allocating funds to projects and initiatives focused on reducing carbon emissions, developing renewable energy, conserving forests and adapting to climate change.
However, there are still various serious impacts on the country’s critical sectors on a larger scale in need of work, and solving problems in the right context is key to capitalizing on high-return opportunities. For example, based on the IIF report, Indonesia’s agriculture and fishing sectors contributed double-digits to the country’s gross domestic product (GDP), but more than 90 percent of farmers and fishermen are smallholders with low living standards and limited access. This creates low-capacity building, compared with the benefits of which their proxy industries are gaining. The supply chain is highly fragmented, resulting in a heavy reliance on intermediaries for distribution and a low share of intermediaries in the retail market price.
The challenges faced by Indonesia in the realm of impact investment are creating awareness for all stakeholders regarding the concept and benefits of impact investment, government regulations, the readiness of sustainable MSMEs to accept investment and sustainable MSME access to existing capital. In facing these challenges, the role and collaboration of various institutions is very important. These challenges are also faced by other sectors such as the environment, health care, education, housing and finance. Indonesia’s archipelagic geography further obscures these challenges as connectivity and transportation become key issues affecting access. While the use of online-based services has increased in the past decades, the quality of usage is still low. Indonesia’s environmental problems are also complicated, as they are closely related to social problems, natural risks and climate risks.
From the investing side, most of the challenges come from the financial market. According to a Mandiri Institute survey this year, environmental, social and governance (ESG) products suffer from a lack of product differentiation with sectoral and fund-style concentration. Eighty percent of asset managers surveyed in the report expressed that a lack of awareness about ESG principles was the main hurdle. The good news is that almost all of them would consider ESG principles in business practices. Companies’ reporting standards are also increasingly necessary as a reference for ESG implementation. Identifying factors can materially affect business sustainability, besides risk management and mitigation, and the capability to optimize each opportunity. A sustainability report is essential not only for companies but also for investors.
Hence, to fill this impact investing gap, deep collaboration between various stakeholders in the private and public sectors as well as regulators is critical. Through the Koalisi Ekonomi Membumi (KEM), a joint initiative to make Indonesia ready for impact investment, Indonesia launched the Sustainable Investment Guide (PIL). The PIL contains information and steps for sustainable business actors to ensure their business development takes into account social and environmental impacts. The PIL can also be used for investors as guidelines to give them the same terminology and measures of progress as business actors to help determine the social and environmental impact of investing in sustainable businesses. This guide can be accessed by all parties and can provide an understanding of how impact investment can encourage sustainable economic development, protect the environment, sustainability and governance.
As part of its support to further boost impact investing traction in Indonesia, Bank Mandiri group through Mandiri Capital Indonesia (MCI) has been managing several types of venture capital. Mandiri Venture Fund (MVF) focuses on early-stage venture fund initiatives with high-growth companies that target early-stage digital start-ups in the Southeast Asia region. The Indonesia Impact Fund (IIF) is Indonesia’s first private impact investment fund, which supports seed-stage start-ups in implementing SDGs in Indonesia. Lastly, the Merah Putih Fund (MPF) is the largest venture fund in Indonesia, jointly managed by five of Indonesia’s state-owned venture capitals to support start-ups that are expected to be the next unicorns to accelerate the growth of the country’s digital economy. To date, the MCI has 21 active portfolio start-ups from various sectors, such as fintech, climate tech, agritech, payments, lending and health care. Three of them have gone through initial public offerings (IPOs), such as start-ups GoTo, Bukalapak and Cashlez.
On Dec. 7, Bank Mandiri will hold the Mandiri Sustainability Forum (MSF) 2023, to facilitate dialogues and engage stakeholders on sustainable business practices in Indonesia. The forum is expected to provide venues to share information and research on global and regional trends in sustainable development. This forum is also intended to increase awareness of ESG issues among business leaders and policymakers.
Going forward, government and business leaders should develop long-term strategies that will help Indonesia build a sustainable and impactful economy. It is important to understand how the country and the world have evolved and develop future strategies that take these environmental and social changes into account. All stakeholders should consider implementing the strategy and measures for a more environmentally sustainable, future economy.