BACKGROUND

The Indonesian economy is recovering after experiencing negative economic growth due to the COVID-19 pandemic. The country’s GDP grew by 5.31 percent in 2022, which was higher than the 3.71% growth rate in 2021. Compared to other expenditure components, the investment sector contributed to such positive growth, accounting for up to 27.6% of nominal GDP (CEIC, 2023). Actual investment in the country reached Rp1.207 billion in 2022, exceeding the national target of Rp1.200 billion. When compared to the number of investments in 2021, this was 34% higher, representing the highest investment growth in the country’s history (DPMPTKP, 2022).

According to actual investment, Foreign Direct Investment (FDI) accounted for 54.2% of the total actual investment. In 2021, the primary metal industry, metal goods, non-machinery, and equipment, received nearly a quarter of the total FDI. West Java, North Maluku, and Central Sulawesi were the top three FDI-destined provinces. On the other hand, actual domestic investment in 2021 was heavily concentrated in the housing, transportation and communications, and construction industries. Nevertheless, the allocated FDI for agricultural and forestry-related sectors was relatively low, and the number of domestic investments in the sectors was relatively high, accounting for up to 7% of total domestic investment.

About This Study

As the 26th UN Climate Change Conference of the Parties (COP26) President, the UK launched the Forest, Agriculture and Commodity Trade (FACT) Dialogue with Indonesia as co-chairs. This government-to-government dialogue brings together the largest producers and consumers of internationally traded agricultural commodities (such as palm oil, soya, cocoa, beef and timber) to protect forests and other ecosystems while promoting trade and development. In the run-up to the 2022 G20 summit, the Tropical Forest Alliance (TFA), under the Gordon and Betty Moore Foundation (GBMF) grants, conducts targeted technical expert discussions in key producer countries that will help garner input and knowledge to steer the G20 debate and proposal under the FACT Roadmap’s Market and Trade Action 3.

This policy brief wraps up the results of the discussion and provides strategic recommendations for policymakers, practitioners, and the general public which identify, build, and mainstream understanding of key factors – from a producer-country perspective – necessary for establishing common expectations among producers and consumer countries around sustainable production as well as effectively developing a ‘guiding partnership framework’ between producer and consumer countries built based on Indonesia’s trade perspective.

Executive Summary

This policy brief documents and explains the lessons learned on how the Siak Regency stakeholders enabled a sustainable balance between the social, economic, and environmental needs and priorities through a jurisdictional approach to regional development.

On 22 July 2016, in the commemoration of World Environment Day, the Minister of Environment and Forestry declared Siak Regency a Kabupaten Hijau (Green Regency).

Restoring the Ecosystem

Threats to Peatland

The conversion and degradation of peatland ecosystems threatens biodiversity, increases the risk of fires, increases carbon emissions, reduces soil quality, and can have a negative impact on local community wellbeing and livelihoods.

The drivers of peatland forest conversion and degradation are complex and varied, and include the expansion of oil palm plantations, the development of industrial timber forests (Hutan Tanaman Industri/HTI); the expansion of food stock agriculture; illegal logging; land and forest encroachment; forest fires; mining activities; and land banking.

A Brief History of Key Developments

Mischief of peat ecosystem due to conversion and degradation is causing degradation of biodiversity, an increase of carbon emission, the reduction of soil quality and disruption of local community livelihood, up until social conflict. This mischief is caused by expansion of oil palm plantation, the development of Industrial Timber Forest (Hutan Tanaman Industri/HTI), expansion of food stock agriculture, illegal logging, land and forest encroachment, forest fire, mining activity, and land banking.

The initiative of Green House Gas (GHG) Emission reduction had been going on globally. This initiative was taken as an improvement on the current global condition that is being threatened by global warming and climate change. The Kyoto Protocol in 1997 establishes the Clean Development Mechanism (CDM), a United Nations-run carbon offset scheme. Indonesia ratifies the Kyoto Protocol via government act number 17/2004 as a follow-up and a basic reference for policies related to climate change that ruled in act number 6/1994.

Summary and Key Messages

Mangroves provide a vital link between terrestrial and oceanic carbon cycles and are one of the most carbon-dense vegetated ecosystems globally, due in part to their high rates of carbon sequestration compared to other ecosystems. The value of mangroves restoration extends far beyond climate change mitigation, they support communities and biodiversity resilience by regulating nutrients, sustaining fisheries, and protecting coasts from storms.

Conservation and restoration of mangroves provide an important opportunity for climate change countermeasure. Restoring 1.6 million hectares of disturbed and degraded mangrove in Indonesia to a healthy state would reduce emission up to 59.4 million tons of CO2 emissions over the next 10 years, and open the door to new economic opportunities such as carbon economy, eco-tourism, and sustainable fisheries.

The advantages of the private sector and financial institutions investment to scaling up mangrove restoration are their leverage to push for faster change through engagement and capital allocation. This trend is expected to strengthen as the new generations of investors, increasingly aware of the environment, social, and governance (ESG) issues, seek investments aligned with their values. Equally, the project itself would profit from the same rigorous approach to project diligence, selection, and feasibility assessment, as done in standard portfolio management.

The government and financial services regulator need to create a supportive enabling environment with efficient and effective incentives, standards and regulations, improved data management, and concessional finance. For the interest of the private sector, nature risks stemming from both impact and dependency on healthy mangroves can be incorporated into investment decisions through risk measurement and reporting. This will encourage financial services to operate with consideration of their financing decision impacts on businesses sustainability and ecosystem integrity (greening finance). In addition, more innovation in finance in developing projects with sufficient cash flow and returns, as well as financial instruments with an attractive risk-return profile, is needed (financing green).

Abstract

Global pressure to ‘clean’ and ‘green’ the agricultural supply chain is increasing, requiring exported agricultural goods to meet certain standards and regulations. Such pressure mainly comes from developed countries as consumers. In this regard, small and medium producers in exporting developing countries are at the highest risk of further marginalization and market exclusion. They lack access to training, information, farm inputs, and financial support to practice sustainable agriculture. Most of the smallholders also have low production levels and live below poverty. To this, current agricultural sustainability frameworks must be urgently reviewed.

We propose enhanced cooperation between producer and consumer countries in the form of: 1) An establishment of communication on agreed framework and institutional arrangements on sustainable agricultural commodities; 2) Stepwise/staging approach and indicators to support transition toward a more sustainable agriculture 3) Umbrella program to support technology transfer and adoption; 4) Investment hub and innovative financing schemes to facilitate trade and investment for smallholders.

Summary and Key Messages

Mangrove restoration has significant natural climate solution, as mangroves and other terrestrial and coastal ecosystems are an important sink and natural tool for climate mitigation. Adaptation is another contribution to the climate solution that mangrove ecosystems play in their communities. Mangrove restoration is considered a win-win investment, providing mitigation and adaptation solutions to climate change while also supporting the implementation of other international pledges and agreements for the SDG Agenda 2030.

Blue carbon of mangroves opens up opportunities in capitalizing the carbon capture and storage to gain economic incentives as well as expediting countries with mangroves to achieve NDC targets for mitigation commitment to the Paris Agreement. Capitalizing on blue carbon will generate the required revenues to enable business endeavours in mangrove conservation and restoration as well as the revenues from the non-carbon benefits of the improved mangrove habitats.

The design of blue carbon pricing systems is important to ensure they provide strong and long-lived investment incentives and are effective at driving emissions reductions and mangroves protection and sustainable management. Effective blue carbon pricing requires well-designed systems that drive deep economic and business transformation. Complementary policy measures are necessary, for example to incentivise innovation, build up social-economy safety net and overcome behavioural barriers.

Transformation of business process from traditional, grant-funded project to income generating business type of restoration by capitalizing blue carbon is crucial to remove the barriers and time-limitations of traditional funding, and allows the business to become self-sustainable, providing more stability and the opportunity to make a bigger impact for mangrove conservation and restoration.

Key Messages

• Mangrove ecosystems are valuable economically and ecologically, providing a vast array of ecosystem goods and services to sustain livelihoods of coastal populations, maintain the very resources of the fishery industry and protect cities and infrastructure from ocean swell and extreme weather events.
• Mangroves also regulate coastal nutrient exchange, and are highly productive and efficient carbon sinks, comprising what is referred to as “blue carbon,” which has very significant value for climate mitigation.
• Mangroves are threatened by deforestation, degradation and unsustainable use driven by lack of understanding and awareness to properly internalize mangrove’s ecosystem service in their decision making.
• Considering the multiple values of mangroves, businesses’ participation in their restoration has high value for ESG proposition beyond CSR. The future carbon market regulation provides opportunities for first movers to gain benefits from the high-quality blue carbon credit from the restoration.
• KADIN and Filantropi Indonesia encourages their members to participate in the development of strategy and on the implementation of restoration activities, as well as the development of the carbon economy to incentivize and attract private sector’s and philanthropies’ participation to build up case studies and lessons learned for effective and sustainable mangrove restoration program.

This policy brief seeks to distil the experiences and application of the jurisdictional approach to curb deforestation and promote forest-positive commodities in Indonesia. This policy brief documents past and current experiences of jurisdictional approaches, initially at the global level and how conceptually been contextualized and consolidated in Indonesia, notwithstanding there remains challenges but also opportunities both at the national and subnational levels.