SHARM EL-SHEIKH, November 16, 2022 — WTW (NASDAQ: WTW), a leading global advisory, broking and solutions company, today announced during the G20 Leaders’ Summit in Bali the launch of a new sovereign risk management programme developed to help Indonesia plan and implement an orderly long-term low carbon transition.
As the world’s largest thermal coal exporter, Indonesia is highly exposed to climate transition risks, due to the country’s economic reliance on the export of coal, amidst an accelerating decline in the fuel’s use in power generation, even in emerging markets.
The WTW Low Carbon Transition Project, funded by Agence Française de Développement (AFD), will work directly with Indonesia’s government, its central bank (Bank Indonesia), and the Financial Services Authority (OJK) to understand the impact a global climate transition will have on the country’s finances. This project will assist the country in designing its own orderly transition, while maintaining economic and financial stability in the face of structural changes as the world decarbonises.
Matt Huxham, Director, Sovereign Transition Risk, Climate and Resilience Hub at WTW, said: “Countries often design climate mitigation plans as if operating in a vacuum. National plans required by the Paris Climate Agreement do not typically reference transition risks – especially those caused by wider regional and global decarbonisation trends. For many developing countries, these risks are exceptionally large and could seriously impact the strength of their public finances if not factored into planning. This would increase the cost and jeopardise the viability of transition plans and, ultimately, our chance of being able to meet Paris Agreement goals.”
In order to measure Indonesia’s transition risk, WTW’s unique Climate Transition Value at Risk (CTVaR) methodology will be used to combine granular microeconomic and financial analysis of individual physical assets and companies, with macroeconomic analysis of how risks are distributed within an economy, and the potential causes of economic and financial instability.
The WTW approach represents a fundamental step change compared to most country-level analyses, which typically only use top-down macroeconomic models. By solely using a top-down approach, without any micro-level analysis, countries are unable to identify concentrations of climate transition risk, which could potentially be destabilising if not managed effectively. Similar analytical failings have been widely recognised as a cause of the Global Financial Crisis of 2007-2008.
Kameswara Natakusumah, Head of Indonesia and Head of Corporate Risk and Broking at WTW, added: “The major benefit of our CTVaR methodology that we use to measure transition risk is that we do not just look at the downside risks. This project will develop detailed Indonesia-specific scenarios and valuable new data. The analysis will enable us to identify opportunities, providing a solid basis to underpin the right investments that are resilient to and benefit from the trends driving Indonesia’s own journey to net zero.”
“This project will develop detailed Indonesia-specific scenarios and valuable new data… providing a solid basis to underpin the right investments that are resilient to and benefit from the trends driving Indonesia’s own journey to net zero,”
Kameswara Natakusumah | Head of Indonesia and Head of Corporate Risk and Broking at WTW.
Beyond the commodity sectors, WTW’s Indonesia project will also develop assessments of potential transition pathways in a range of economic areas, including transport, industry and land-related sectors. It will also include insight on the challenges facing certain workers, communities and local governments. This will help them build resilience to upcoming structural changes and guide the government in identifying vulnerable groups and regions.
The project is also expected to generate outputs that support the Indonesian government in its negotiations with international partners around a Just Energy Transition Partnership to facilitate the early retirement of coal fired power plants, and the development of carbon markets and related financing designed to help preserve Indonesia’s rainforests.
Matt Huxham said: “Our long-term collaboration with AFD, as funder and partner, has been instrumental. We look forward to working closely with the agency’s local network, as well as with researchers from Indonesian public institutions, to ensure that we are developing accurate findings and broadening awareness of climate transition analysis at the same time.”
Yann Martres, AFD Country Director in Indonesia, said: “Our work in Indonesia on low-carbon transition pathways is one of our most ambitious yet. A key objective of this work led by WTW is to support Indonesia in designing and implementing an orderly transition across many economic sectors, such as coal, oil, gas and industry. This work is fully in line with AFD’s mandate in Indonesia, which aims to support Indonesian transition towards a low-carbon development through fair and resilient pathways.”
The Indonesian sovereign risk programme is the first to be conducted in Asia and represents the latest in a series of ground-breaking projects by WTW’s Climate and Resilience Hub (CRH), which includes similar initiatives conducted in Latin America and Africa.
As part of the same programme, WTW’s Climate and Resilience Hub also recently published the results of analysis on the climate transition risk exposure of current and future potential natural gas producers in twelve African countries. This work was conducted in collaboration with The African Climate Foundation.
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