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The Chain: A Tale of Two Indonesian Green Bonds

April 19, 2018

Over the past two weeks, two green bonds were issued in Indonesia. The Government of Indonesia issued a USD 1.25 billion green sukuk bond – a government first – while Tropical Landscapes Finance Facility (TLFF) issued a USD 95 million sustainability bond.

Both bonds target some of their proceeds towards sustainable landscapes, but these two bonds are a study in contrasts. The TLFF bond has a clear approach to deforestation risk mitigation while the green sukuk includes an “element of deforestation.”

Tropical Landscapes Finance Facility

Funds from the TLFF bond will finance a set of natural rubber plantations whose activities focus on reforestation on heavily degraded land in two provinces in Indonesia. The project includes social and environmental objectives. As a safeguard, the project also includes a buffer zone to protect a nearby national park from any encroachment. 

BNP Paribas arranged the bond issuance whose proceeds will pass through the special purpose vehicle, TLFF. TLFF then transfers funds to PT Royal Lestari Utama (RLU). RLU was founded in 2014 as a joint venture by France’s Michelin and Indonesia’s Barito Pacific Group. RLU is focused on developing natural rubber production in Jambi, Sumatra and East Kalimantan provinces in Indonesia with an emphasis on climate smart, wildlife friendly and socially inclusive management practices. It administers concessions covering 88,000 hectares in total.

UN Environment, World Agroforestry Centre (ICRAF), ADM Capital and BNP Paribas launched TLFF as a partnership to finance projects and companies that encourage eco-friendly growth and boost rural livelihoods in Indonesia. TLFF issued two classes of secured fixed rate notes, Class A notes and Class B notes, together totaling USD 95 million.

Moody’s assigned an AAA rating to the Class A Notes issued by TLFF, meaning that they are considered “investment grade.” Moody’s rating only considers risks to credit risks from transaction, and does not include other deforestation-associated risks. Importantly, Moody’s rating does not include the Class B Notes in the bond, the reasoning for which is unknown.

USD 70 million of the bond were covered by a partial guarantee from the United States Agency for International Development (USAID). This guarantee protects investors from 50 percent of TLFF net losses of principal on the Guaranteed Loan Portion. After adjusting this for the pro-rata first loss amount, USAID guarantees a maximum of USD 33.25 million.

The buyers of this debt instrument were not publicly disclosed, but as the first corporate sustainability bond in Asia, this transaction is noteworthy. Vigeo Eiris, a research firm, has validated the bonds as ’Sustainability Notes.’

Government of Indonesia Green Sukuk

Last month, the Government of Indonesia issued a USD 1.25 billion green sukuk bond maturing March 2023. It is the first green sukuk bond issued in the market globally. Sukuk bonds follow Islamic financing rules.

Green sukuk bonds have been discussed in the market since 2006 when Malaysian Nature Society alongside AmBank Berhad proposed a green sukuk bond to finance conservation of the Belum Temenggor Forest Complex in Malaysia via the Perak State Parks Corporation.

Indonesia’s green sukuk was heavily oversubscribed and demand lowered initial pricing guidance for investors by 30 basis points. This reduced its yield to 3.75 percent. Funds from the transaction will be allocated to finance renewable energy projects, green tourism and waste management.

The issuance documents seen by Reuters show that  some of the bond’s financing includes “an element of deforestation.” But the process for projects to be funded by the green sukuk includes a two process checks. These are each project needs to be tagged for its mitigation or adaptation outcomes and then each project is screened against the Government of Indonesia’s Green Bond and Green Sukuk Framework.

CICERO, in its Second Opinion, based on the Government of Indonesia’s Green Bond and Green Sukuk Framework that is aligned with the Green Bond Principles, the ASEAN Green Bond Standards and Indonesia’s contribution to the Paris Agreement, stated:

  • “It might also be possible that some projects include an element of deforestation. However, as per Indonesian regulation it is mandatory to undertake an Environmental Impact Assessment (AMDAL) for all projects or businesses that have a boundary overlap with, or may impact on, any of twenty classifications of protected area including forest area, national parks and reserves.” (p. 15)
  • “(projects will include) developing sustainable tourism, and lists as an example eco-tourism based on REDD + forest management.” (p. 15)
  • “the sustainable agriculture projects funded through this framework will not support or finance the development of new agricultural land through deforestation.” (p. 16)

Essentially, the likelihood that this green sukuk issuance funds deforestation is very low.

CIMB, Citigroup, Dubai Islamic Bank, HSBC and Abu Dhabi Islamic Bank worked as bookrunners for the offering. Fitch Ratings assigned a rating of BBB to the green sukuk bond. The rating follows Indonesia’s BBB Long-Term Foreign-Currency Issuer Default Rating.

The buyers of the sukuk were also not disclosed


As these two bonds went to market, it is key to note that the zero-deforestation components of each bond varied. The TLFF clearly is focused on forest restoration and sustainable livelihoods that enable conservation of endangered carbon rich ecosystems and rare wildlife. On the other hand, the Government of Indonesia green sukuk bond has “an element of deforestation” which may be riskier for investors to own, if this deforestation violates these investors’ deforestation and agriculture supply chain investment policies.

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