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Indonesia has been warned it may not fully benefit from its recent investment grade status to draw significant offshore funding if it fails to impress investors looking for environmentally sustainable investments.

Two international rating agencies have in the past month granted Southeast Asia’s largest economy investment-grade status, improving its chances of attracting long-term foreign funds.

However, Elmar Bouma, the director of the Indonesia Netherlands Association, cautioned that pension funds and investment managers, which together account for an estimated $30 trillion in capital, had strict sustainability requirements in line with the UN Principles for Responsible Investment.

“Its hard to say how much of that would come to Indonesia, because they apply much stricter standard regarding sustainability,” Bouma told a news conference on Thursday.

Data from Towers Watson and UNPRI’s Web site show that big funds include Norway’s Government Pension Fund Global, the world’s second-largest sovereign fund with more than $550 billion in assets, and South Korea’s National Pension, the world’s third largest with around $290 billion.

Indonesia, with its $706 billion economy, is fast becoming a magnet for foreign investors as its growth continues amid a global crisis marked by European debt and the US economic slowdown.

Indonesia’s prudent fiscal and monetary position, coupled with its demographic bonus — a productive population that outnumbers its unproductive one — provides a foundation for accelerating growth over the next decade.

“Indonesia promises growth in the long term, but the scope of those pension funds is longer,” said Poltak Hotradero, the head of research at the Indonesia Stock Exchange.

Bouma said Indonesia’s banking system should take the  initiative to spearhead sustainable banking practices. There are 120 commercial banks operating in Indonesia.

“The banking sector of Indonesia must anticipate this development to tap the new source capital,” he said.

Sakariza Qori Hermawan, group head of corporate sustainability at Bank Negara Indonesia, said Bank Indonesia, the central bank, may soon issue a regulation on green banking.

Lenders would be required to assess customers based on social and environmental sustainability standards as well as financial.

Thus far, he said, social and environmental sustainability were low priorities for Indonesia’s banks and businesses.

Sakariza said his Jakarta-based lender had only disbursed Rp 7.7 trillion ($862.4 million) in “green category” loans in 2010, or around 5.7 percent of its total outstanding loans valued at Rp 136.4 trillion. Some green loans financed geothermal power plants.

“Looking for excellent green companies is quite hard,” he said.
Sakariza said green banking would force corporations to comply with the UNPRI framework.

Rubin Japhta, a senior officer at the International Finance Corporation, said Indonesian companies and banks would need time to change their business paradigm.

While waiting for the shift, he said, Indonesian banks could try to tap the funds while committing themselves to transformation along the way.

The IFC, the investment arm of the Washington-based World Bank, has implemented these “flexible” policies with its investment partners in Indonesia including Bank Tabungan Pensiunan Negara, Bank Maybank Indonesia, Hana Bank and Bank Danamon.