Indonesia’s CRMS Framework and Its Alignment with NGFS Scenarios

As a country highly vulnerable to climate change, Indonesia has taken significant steps to integrate climate risk management into its financial system. The Otoritas Jasa Keuangan (OJK), Indonesia’s financial regulator, has introduced the Climate Risk Management & Scenario Analysis (CRMS) framework, aimed at strengthening climate resilience in the banking sector.

At the same time, Indonesia aligns its climate risk management strategies with global best practices, particularly the NGFS Climate Scenarios, which provide a standardized approach to assessing climate-related financial risks.

Overview of Indonesia’s CRMS Framework

1. What is CRMS?

The Climate Risk Management & Scenario Analysis (CRMS) framework, introduced by OJK in 2024, is designed to help banks:

• Identify, measure, and manage climate-related financial risks.

• Conduct scenario analysis to assess the impact of climate change on lending and investment portfolios.

• Align financial decision-making with national and global climate commitments.

2. Key Components of CRMS

The CRMS framework consists of five core elements:

1. Governance – Ensuring banks integrate climate risk management into decision-making.

2. Business Strategy & Risk Framework – Aligning banking activities with sustainable finance principles.

3. Scenario Design & Risk Analysis – Conducting stress testing based on climate scenarios.

4. Disclosure & Reporting – Enhancing transparency in climate-related financial risks.

5. Implementation Planning – Establishing a roadmap for effective climate risk management.

How Indonesia’s CRMS Aligns with NGFS Scenarios

The NGFS Climate Scenarios provide a global framework for understanding climate-related financial risks. Indonesia’s CRMS framework incorporates NGFS scenarios to ensure that banks and financial institutions:

• Use science-based scenario analysis to assess transition and physical risks.

• Align with international best practices in climate risk management.

• Strengthen financial resilience against climate shocks.

1. Scenario-Based Climate Risk Assessment

The CRMS framework encourages banks to adopt NGFS scenarios for stress testing financial impacts. This includes:

• Orderly Transition Scenarios, where Indonesia successfully implements climate policies in line with its Net Zero 2060 commitment.

• Disorderly Transition Scenarios, where delayed policies increase economic and financial volatility.

• Hot House World Scenarios, where Indonesia faces extreme climate-related physical risks, such as rising sea levels and heatwaves.

2. Indonesia’s Climate Policy Commitments

Indonesia has committed to reducing greenhouse gas (GHG) emissions through:

• Enhanced Nationally Determined Contributions (NDCs), targeting a 43.2% emission reduction by 2030.

• Implementing a carbon tax policy and developing a carbon trading exchange (IDX Carbon).

• Promoting sustainable finance, requiring banks to align lending with climate risk management frameworks.

3. Strengthening Financial Sector Resilience

By incorporating NGFS scenario analysis, Indonesia’s CRMS framework ensures that banks:

• Integrate climate risks into credit and investment decisions.

• Develop low-carbon transition financing strategies.

• Enhance climate-related risk disclosures to align with global financial stability initiatives.

Conclusion

Indonesia’s CRMS framework is a significant step toward integrating climate risk management into financial sector policies. By aligning with NGFS scenarios, Indonesia strengthens its financial system’s resilience against climate-related economic shocks. As climate change intensifies, banks and financial institutions must proactively adopt scenario analysis to navigate future risks and opportunities in the transition to a sustainable economy.