ESG 2023 Comparisons

Background

Environmental, social and governance (ESG) constitute three benchmarks that serve as the primary measure for assessing business sustainability. The environmental criteria are fundamentally concerned with businesses’ impacts on the environment. The social criteria scrutinise the relational dynamics between companies and their diverse stakeholders, including local communities, employees, and other engaged third parties. The criteria are closely related to issues regarding human rights, inclusion, and equality. In parallel, the governance aspect of ESG delves into good governance principles such as information disclosure, prevention of corruption, transparent management, and others (UNDP, 2023).

ESG has quickly claimed the spotlight, following the Indonesian government’s commitment to achieve the 17 United Nations Sustainable Development Goals (SDGs) that seek to foster sustainable development by 2030, characterised by the eradication of poverty, safeguarding the environment, and the universal enjoyment of peace and prosperity (IDX, 2023). Bolstering this commitment, the National Planning Agency (Badan Perencanaan Pembangunan Nasional, or Bappenas) published a “Roadmap of SDGs: Indonesia” in 2018, which sets out policy directions and strategies for each of the 17 SDGs from 2020‒30.

Within Indonesia’s regulatory landscape, a multitude of ESG directives exists, albeit scattered across various sectoral regulations. By way of example, Law No 32 of 2009 on Environmental Protection and Management (as amended) requires businesses and/or activities having significant impacts on the environment to prepare an Environmental Impact Analysis (Analisis Mengenai Dampak Lingkungan Hidup, or AMDAL). Workers’ interests are protected under Law No 13 of 2003 on Manpower (as amended), which defines the fundamental rights and responsibilities of workers and employers alike ‒ for example, compensation for workers who are laid off, prohibition of child labour, and health and safety in the workplace. There are also sector-specific ESG aspects, such as:

• Indonesian Sustainable Palm Oil (ISPO), a mandatory certification to ensure palm oil plantation sustainability; and
• the Sustainable Forest Management Certificate (Sertifikat Pengelolaan Hutan Lestari, or S-PHL), which is given to forestry-related licence holders that implement sustainable forest management.

In recent years, regulations specifically addressing ESG and sustainability have begun to surface, primarily within the financial domain. Although some measures are mandatory (particularly in relation to ESG disclosure in the financial sector), most measures are largely still voluntary. However, the lack of mandatory legal measures does not stop the big players from public and private stakeholders taking on their own ESG initiatives. The sole electricity offtaker and state-owned electricity enterprise (PT Perusahaan Listrik Negara, or PLN) launched its first Task Force on Climate-Related Financial Disclosures in September 2023, which contains governance, strategies and risk management concerning the ramifications of climate change on PLN’s business (PLN, 2023).

PT Sarana Multi Infrastruktur (Persero) (SMI), an infrastructure financing company owned by the Indonesian government, issued a IDR500 billion Phase 1 green bond in 2018 that has contributed to a couple of mini-hydro power plants development in Sumatera and the Jabodebek Light Rail Transit (LRT) project (CNBC, 2022). SMI also published a comprehensive Green Bond Framework, which serves as a guidance for selecting projects and use of proceeds as well as SMI’s reporting procedure on the fund’s utilisation (World Bank, 2018).

Unilever, as one of the biggest multinational consumer goods companies, has integrated sustainability in their business since 2010. This is evidenced by the Unilever Sustainable Living Plan for 2010‒20, followed by the Unilever Compass as the company’s sustainability business strategy (Unilever Indonesia Sustainability Report, 2020). Local banks have also partaken in the ESG movement ‒ for example, PT Bank Rakyat Indonesia has taken a stance by ceasing to finance activities that adversely affect the environment and committing to implement sustainability financing integrated with ESG aspects (Katadata, 2022).

Overview of ESG-Related Regulatory Framework in Indonesia

This article outlines several key regulations relating to ESG, as follows.

ESG-related requirements

Since 2007, Indonesia has required companies carrying out business activities in the field of and/or related to natural resources to conduct social and environmental responsibilities through Law No 40 of 2007 on Limited Liability Companies (as amended) (Law 40/2007) and Government Regulation No 47 of 2012 on Social and Environmental Responsibility of Limited Companies (GR 47/2012). Such social and environmental responsibilities are conducted by the directors based on an annual work plan and must be reported to the general meeting of shareholders in the company’s annual report. There will be sanctions for companies that do not carry out the social and environmental responsibilities, but it is not clear what form these sanctions will take.

Particularly for financial institutions (Lembaga Jasa Keuangan, or LJKs), issuers (emiten) and public listed companies, stricter requirements are mandated by the regulator and supervisor of financial services industries (Otoritas Jasa Keuangan, or OJK) under Regulation of Financial Services Authority No 51/POJK.03/2017 on Implementation of Sustainable Finance for Financial Services Institutions, Issuers and Public Companies. LJKs, issuers and public listed companies are required to implement sustainable finance by:

• submitting an annual Sustainability Report (Laporan Keberlanjutan) to the OJK and publishing the report on their websites; and
• specifically, in the case of LJKs, submitting their Financial Sustainability Action Plan (Rencana Aksi Keuangan Berkelanjutan) annually to the OJK containing one-year and five-year work plans to implement sustainability finance.

LJKs, issuers and public companies violating these requirements will be subject to administrative sanctions in the form of reprimand or written warning.

The OJK can also give incentives to LJKs, issuers and public companies implementing sustainable finance effectively, in the form of competency development programmes for their HR, sustainable finance awards, and other forms of incentives.

OJK Circular Letter No 16/SEOJK.04/2021 on Form and Content of an Issuer’s or Public Company’s Annual Report (SEOJK 16/2021) further enumerates the following information that must be disclosed in the Sustainability Report:

• explanation of sustainability strategy;
• overview of sustainability aspects (economic, social and environmental);
• brief profile of the issuer or public company;
• explanation from the board of directors;
• sustainability governance;
• sustainability performance;
• written verification from an independent party (if any);
• feedback sheet for readers (if any); and
• the issuer’s or public company’s response to previous year report feedback.

National strategies for business and human rights

Presidential Regulation No 60 of 2023 on National Strategies for Business and Human Rights aims to solidify the Guiding Principles on Business and Human Rights: Implementing the UN Protect, Respect and Remedy Framework developed by the UN in Indonesia’s national policy. It serves as guidance for ministries, agencies, local governments, business actors and other stakeholders in developing businesses that also consider the protection, respect and restoration of human rights.

The regulation sets out the strategies, actions, performance indicators, and the ministries responsible for each action that will be implemented in the next three years until 2025. A task force was also formed in 2021 to co-ordinate the implementation of such business and human rights strategies at national and regional levels.

Sustainable Finance Roadmap I and II 

The OJK published the Sustainable Finance Roadmap Phase I (2015–19) with the intention of improving financial services industry players’ knowledge and capacity to transition to a low-carbon economy. There were three strategies set out in the Sustainable Finance Roadmap Phase I to actualise sustainable finance ‒ namely, increasing:

• supply of environmentally friendly financing;
• demand of environmentally friendly financing products; and
• oversight and co-ordination of sustainable finance implementation.

All three strategies will be implemented in the medium term (2015‒19) and long term (2020‒24) (OJK, 2021).

The Sustainable Finance Roadmap Phase I accomplished a number of milestones, including the issuance of the following regulations:

• POJK 51/2017, which establishes eight sustainable finance principles and the requirement to implement sustainable finance for LJKs, issuers and public companies as explained earlier;
• OJK Regulation No 60/POJK.04/2017 on the Issuance and Requirements of Green Bond, which describes the requirements and procedures relating to green bond issuance as well as business activities that can be considered environmentally friend and be financed with the green bond;
• the OJK’s Board of Commissioners Decree No 24/KDK.01/2018, which gives an incentive in the form of 25% reduction fee for first-time issuers registering green bond transactions in the capital market; and
• Letter of Chief Executive of Banking Supervision N-14/D.03/2020 regarding banking support in accelerating battery electric vehicle development.

Despite the aforementioned efforts, given the industry’s low level of understanding on sustainable financing and the absence of nationally applicable green standards, the OJK further developed the Sustainable Finance Roadmap Phase II (2021‒25) (OJK, 2021). The Sustainable Finance Roadmap Phase II concentrates on addressing the physical risk, transition risk, and liability risk associated with transitioning to a low-carbon economy by focusing on the development of the following seven components:

• policy;
• products;
• market infrastructure;
• co-ordination among related ministries/institutions;
• non-governmental support;
• HR; and
• awareness.

The above-mentioned components have been implemented through various programmes ‒ for example, Bappenas initiated a Sustainable Finance Information Hub, which is a programme focused on accelerating sustainable financing to achieve the SDGs by synergising financial and non-financial resources (Bappenas, 2023). A National Task Force was also formed, in which one of the programmes is to expand the use of local currency transactions in Indonesia with partner countries (OJK, 2022). This programme involves the participation of Bank Indonesia, the Co-ordinating Ministry for Economics Affairs, the Co-ordinating Ministry for Maritime Affairs and Investment, the Ministry of Finance, the Ministry of Foreign Affairs, the Ministry of Industry, the Ministry of Trade, the Ministry of State-Owned Enterprises, the OJK and the Indonesia Deposit Insurance Corporation (Bank Indonesia, 2023).

Indonesia Green Taxonomy

In addition to the Sustainable Finance Roadmaps, the OJK issued Indonesia Green Taxonomy Edition 1.0 (2022) (the “Indonesia Green Taxonomy”) in order to implement the Sustainable Finance Roadmap Phase II (Andre Simangunsong, 2022). The Indonesia Green Taxonomy aims to develop a science-based standard definition and green criteria from economic sector activities that support the climate change mitigation and adaptation agenda in Indonesia and provides a reference for financial services sectors, investors, and business actors (both at national and international levels) to disclose information regarding financing, funding and investment for green economic activities. It is a dynamic/living document and is voluntary.

The classified business activities are structured based on Indonesia Standard Industrial Classification (Klasifikasi Baku Lapangan Usaha Indonesia, or KBLI) and each activity has its own requirements for being classed as green, yellow, and red categories. The green category does not cause significant harm, applies minimum safeguards, has a positive impact on the environment, and aligns with the environmental objective of the Indonesia Green Taxonomy. The yellow category does not cause significant harm, whereas the red category is considered to constitute harmful activities. By way of example, palm oil plantation can be considered as green if the activity has ISPO and other international standards, whereas coal mining has no green category.

ESG framework and manual for PPP projects

Along with the OJK, the Ministry of Finance has also made efforts to integrate ESG in its activities by issuing the ESG Framework and Manual in Government Support and Facility for Infrastructure Financing. The ESG Framework and Manual aim to implement ESG principles in PPP schemes in Indonesia – a contract between a government entity (usually called a Government Contracting Agency, or GCA) and a private sector entity (usually called an Implementing Business Entity, or IBE) to provide a public asset or service jointly with allocated risks and responsibilities (ESG Manual, 2022). The Ministry of Finance intends to focus on the implementation of the ESG Framework and Manual in PPP projects initially and then work its way to non-PPP projects that receive government support by 2025 (ESG Framework, 2022).

Both the ESG Framework and Manual provide guidance for all PPP stakeholders ‒ including the Ministry of Finance, GCAs, IBEs and the facility implementers ‒ in implementing ESG in every business process aimed at providing government support for PPP, including:

• ESG risk analysis and assessment in the government support’s scope;
• taking necessary ESG-related mitigation measures throughout the entire project cycle; and
• incorporating ESG elements in the transaction documents and performance indicators.

The framework comprises ten ESG principles, including:

• pollution prevention and waste management;
• biodiversity conversation;
• natural resource management and energy efficiency;
• climate change mitigation and adaptation, and disaster risk;
• employment and work environment;
• diversity, equality, inclusivity, and access;
• social interest; and
• cultural heritage.

The ESG Manual itself is a more detailed explanation of the ESG Framework. It contains technical instructions for implementing ESG in the infrastructure project stages and sets out clearly “who” does “what” to implement ESG principles in business processes. It also provides a number of tools that can be used by stakeholders to carry out EGS activities.

Other relevant regulations relating to energy transition and carbon trading

Coal phase-out

Indonesia made a legal breakthrough via the issuance of Presidential Regulation No 112 of 2022 on the Acceleration of Renewable Energy Development for Electricity Generation (PR 112/2022), which is the first regulation to mandate the phasing-out of coal-fired power plants and prohibit the development of new coal-fired power plants. PR 112/2022 acts as a legal basis for PLN, as the sole electricity offtaker in Indonesia, to accelerate the early termination of its own coal-fired power plants and power purchase agreements with coal-fired power plant developers. Such early termination will be supported by various ministries ‒ from the Ministry of Finance (which will provide financing aid) to the Ministry of Energy and Mineral Resources, which is in the process of establishing a list of coal-fired power plants that should be terminated early and developing a roadmap for such early termination of coal-fired power plants.

On 4 October  2023, the Ministry of Finance issued Ministry of Finance Regulation No 103 of 2023 on the Provision of Fiscal Support Through Financing and Funding for Accelerating Energy Transition in the Electricity Sector (MOEF Reg 103/2023). This regulation is designed to offer various facilities (including loans and facilities for PPPs) so as to expedite the early termination of captive coal-fired power plants and promote the development of renewable energy. Such facilities are channelled through SMI as the platform manager, which is mandated to oversee the energy transition platform – a platform that facilitates funding and financing for energy transition within the electricity sector. This regulation serves as a legal basis for the Ministry of Finance to actively participate in accelerating the process of energy transition by providing fiscal support.

Carbon trading

In 2021, the government finally released the long-awaited Presidential Regulation No 98 of 2021 on Carbon Pricing for Achieving NDC Target and Controlling GHG Emission in National Development (PR 98/2021). PR 98/2021 signifies Indonesia’s commitment to achieving its Nationally Determined Contribution (NDC) target and materializing a sustainable, low carbon economy landscape. It introduces carbon pricing as one of the strategies to carry out climate change mitigation and adaptation, which includes carbon trading, result-based payment, and carbon levy.

Within two years, the Indonesian Government issued several other implementing regulations for PR 98/2021, with the aim of accelerating the implementation of carbon trading in Indonesia. Ministry of Environment and Forestry Regulation No 21 of 2022 on the Procedures for Carbon Pricing Implementation (MOEF Reg 21/2022) was issued one year after PR 98/2021 and sets out the technical procedures and further requirements for carrying out carbon trading, including:

• the requirement to register carbon trading activities to an integrated governmental platform called Climate Change Control National Registry System (Sistem Registri Nasional Pengendalian Perubahan Iklim, or SRN PPI);
• the use of a Greenhouse Gas Emission Reduction Certificate (Sertifikat Pengurangan Emisi Gas Rumah Kaca, or SPE-GRK) for carbon trading; and
• the monitoring, reporting and verification (MRV) requirements.

One of the critical issues that trigger a long debate in MOEF Reg 21/2022 is the restriction to carry out international carbon trading until the NDC target for subsector or sub-subsector is achieved. This restriction has halted international carbon trading in Indonesia ‒ something that contributed significantly to carbon trading implementation in Indonesia prior to PR 98/2021. The Ministry of Environment and Forestry (MOEF) is currently preparing a detailed procedure for international carbon trading that is expected to address this restriction and continue international carbon trading.

The forestry and energy sectors, as the two primary sectors in achieving the NDC target, also have their own regulation for carbon trading, namely:

• MOEF Regulation No 7 of 2023 on the Procedures for Carbon Trading in the Forestry Sector (MOEF Reg 7/2023); and
• Ministry of Energy and Mineral Resources Regulation No 16 of 2022 on the Procedures for Carbon Pricing Implementation in the Power Plant Subsector (MEMR Reg 16/2022).

One of the notable aspects regulated in MOEF Reg 7/2023 concerns the licences required to carry out carbon trading in different types of forestry area, whereby it is clarified that business actors can use their current forest-related licences (eg, forest utilisation business licenses, social forestry management approval, or management rights) for carbon trading in certain production and protection forest areas. MOEF Reg 7/2023 also indicates that international carbon trading may be carried out if there are emission reduction results in excess of the sub-subsector NDC target; however, the implementation remains to be seen.

MEMR Reg 16/2022 primarily governs the greenhouse gas emission ceiling for coal-fired power plants and the emission quota for each coal-fired power plant company, as well as the procedure for carrying out emission trading for those plants. This emission ceiling has been established for coal-fired power plants connected to PLN’s grid in January 2023. The emission ceiling is determined for mine-mouth coal-fired power plants above 100 MW and non-mine-mouth coal-fired power plants with a capacity of 25 MW–100 MW, 100 MW–400 MW, and more than 400 MW. For coal-fired power plants not connected to PLN’s grid and coal-fired power plants for self-use, the emission ceiling will be imposed no later than 31 December 2024. This regulation also indicates that carbon trading for coal-fired power plants can at least commence immediately in 2023, with the full-fledged implementation starting in 2025.

Indonesia is also gearing up to join the international carbon market, with the launch of the first Indonesian carbon exchange (IDXCarbon) on 26 September 2023. IDXCarbon is administered by the Indonesia Stock Exchange (IDX) and is expected to be connected to the international carbon market soon. The development of IDXCarbon is under the auspices of OJK Regulation No 14 of 2023 on Carbon Trading Through Carbon Exchange (OJK Reg 14/2023) and several operating regulations of IDX. In essence, the emission reduction certificate (SPE-GRK) and greenhouse gas emission quota (eg, for coal-fired power plant companies) are the legally recognised carbon units to be traded in four types of market in IDXCarbon ‒ namely, the auction market, the regular market, the negotiation market, and the non-regular market.

Carbon tax

In parallel with the development of carbon trading, Law Number 7 of 2021 on Harmonisation of Tax Regulations (Law 7/2021) was issued, thereby mandating the imposition of carbon tax. Carbon tax will be imposed on individuals or entities that purchase goods containing carbon and/or carry out activities that produce carbon emissions. The carbon tax rate is set at higher than or equal to the carbon price in the carbon market; however, Law 7/2021 sets a floor price for carbon tax, which is IDR30 per kilogram of carbon dioxide equivalent (CO2e) or equivalent unit.

Based on Article 17 of Law 7/2021, the carbon tax was initially planned to take effect on 1 April 2022 and would first be imposed on coal-fired power plants at a rate of IDR30 per kilogram of CO2e or equivalent unit. However, the implementation has been postponed until 2025 (CNBC, 2022). Law 7/2021 indicates that carbon tax will be imposed on coal-fired power plants that exceed the greenhouse gas emission quota (cap and tax), but the clear mechanism of such imposition remains to be seen as the Ministry of Finance regulation on carbon tax is still under preparation.

Outlook for ESG in Indonesia

Indonesia already has a number of ESG-related regulations, although most of these regulations are voluntary in nature and merely serve as a guidance for business actors. There are also limited regulations that offer explicit incentives or facilities for business actors that implement ESG principles, leaving it up to the business actors to voluntarily integrate ESG principles in the business operations based on their own willingness and commitment. This lack of mandatory measures relating to ESG is aggravated by the low knowledge and awareness of ESG among the business actors themselves (particularly in sectors utilising natural resources) and could potentially have a negative impact on the environment.

Furthermore, there is a lack of clarity regarding the extent to which businesses subject to the ESG-related requirements under GR 47/2012, POJK 51/2017 and SEOJK 16/2021 adhere to these regulations, as there is no transparency when it comes to the enforcement of such requirements. Sanctions for companies that do not carry out the social and environmental responsibilities under GR 47/2012 are unclear and the sanctions for LJKs, issuers and public companies under POJK 51/2017 are considerably lenient, consisting only of reprimands and written warnings.

The Indonesian government needs to ramp up its efforts in advancing the nation’s ESG agenda. A more robust and comprehensive regulatory framework is necessary in order to push business actors to implement ESG principles, including more ESG-related obligations, attractive incentives, and vigorous legal enforcement where companies fail to fulfil the ESG-related obligations. The ESG obligation under GR 47/2012 and ESG disclosure requirement under POJK 51/2017 should also be linked to the ESG guidelines published by various ministries and institutions ‒ for example, the Sustainable Finance Roadmap Phase II and Indonesia Green Taxonomy developed by the OJK, as well as the ESG Framework and Manual developed by the Ministry of Finance. This would be a positive step forward towards standardising ESG implementation and reporting across various business sectors.

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