Introduction

The practice of ESG is continuously gaining traction in Indonesia as businesses and organisations recognise its importance in sustainable development. This year, several notable ESG projects have emerged, reflecting Indonesia’s commitment to integrating ESG principles into various sectors. For instance, the launch of Orange Bonds in July 2024 by the Ministry of National Development Planning/National Development Planning Agency (Bappenas) together with the Ministry of Finance and Impact Investment Exchange. The Orange Bonds are issued as a support to the Orange Movement mission to offer an innovative financing solution that promotes social and economic inclusion by providing greater financial access to women and marginalised groups (Bappenas, 2024). 

Another significant milestone in Indonesia is the issuance of SEC-registered dual currency bonds, which include a USD1.8 billion global bond and an EUR750 million Sustainable Development Goals (SDG) global bond (Ministry of Finance, 2024). This marks the largest global USD and EUR bond by Indonesia, demonstrating Indonesia’s commitment to integrate ESG principles into its financing strategy. Indonesia will use the bond issuance to fund projects under Indonesia’s SDGs Government Securities Framework, which aligns with the International Capital Market Association (ICMA) principles.

The Issuance of Guidance for Sustainable Finance in Indonesia

In February 2024, the Indonesian Financial Service Authority (OJK) released the Guidance for Sustainable Finance in Indonesia (Taksonomi untuk Keuangan Berkelanjutan Indonesia or TKBI). The TKBI provides a guideline for investors, developers and stakeholders aimed at increasing capital allocation and sustainable financing in order to support Indonesia’s net-zero emission target by classifying economic activities into three categories: green, energy transition or not meeting any classification.

The TKBI is designed to replace the Green Taxonomy Indonesia (Taksonomi Hijau Indonesia or THI), the existing guideline for sustainable finance. This year, OJK has prioritised the development of the TKBI in the energy sector to support a gradual and balanced energy transition. The TKBI is set to gradually expand to include other sectors covered in Indonesia’s Nationally Determined Contributions (NDC), such as waste, industrial processes and product use, agriculture, forest and other land use (FOLU). Therefore, the THI remains applicable for sectors other than the energy sector.

The TKBI enhances the rating mechanism for economic activity classification by introducing environmental objectives (EOs) and essential criteria (EC) as key parameters. EO include:

• climate change mitigation;
• climate change adaptation;
• protection of ecosystem and biodiversity; and
• resource resilience and transition to a circular economy. 

All activities in the TKBI must also meet the EC, which include:

• do no significant harm;
• remedial measures to transition; and
• social aspects.

Based on these parameters, the TKBI will categorise activities as “green” if they fulfil at least one EO and all EC or as “transition” if they meet one EO and some EC.

A notable advancement in the TKBI is its inclusion of energy sector activities previously unaddressed by the THI, such as early termination of coal-fired power plants, electricity storage, energy efficiency/conservation services, and carbon capture and storage. Since these activities currently lack specific classifications under the Indonesian Standard Business Field Classification (Klasifikasi Baku Lapangan Usaha Indonesia or KBLI – classification codes used to identify the risk level and business licences required for each business activity), the TKBI groups these activities under the most relevant existing KBLI categories. For example:

• early termination of coal-fired power plants and electricity storage are included within the KBLI for electricity generation;
• conservation services/energy efficiency is categorised under the KBLI for electricity supporting activities; and
• carbon capture and storage is included within the KBLI for oil and gas mining.

This strategic integration provides a clearer regulatory pathway, indicating that businesses in these emerging areas may utilise existing KBLIs and business licences to operate.

Transformation to Green Economy to Achieve the Indonesia Gold 2045 Vision

On 13 September 2024, Indonesia issued the long-awaited Law No 59 Year 2024 on National Long Term Development Plan 2025-2045 (Rencana Pembangunan Jangka Panjang Nasional orRPJPN 2025-2045). RPJPN 2025-2045 lays out the “Indonesia Gold 2045 Vision”, which consist of five goals with a notable commitment to reducing carbon intensity towards net zero. Specifically, the RPJPN 20245-2045 aims to reduce greenhouse gas emissions to 93.5% by 2045 (compared to the 2010 baseline) and increase environmental quality to 83% by 2045. For the energy sector, the RPJPN 2025-2025 aims to achieve a new and renewable energy mix of 70%.

Acknowledging the impact of global warming on Indonesia’s development, the RPJPN 2025-2045 calls for a paradigm shift to curb greenhouse gas emissions and promotes a green economy, which encompasses energy transition, circular economy practices and sustainable forest management. The energy transition programme comprises renewable and nuclear development, energy storage development and fossil fuel retirement.        

The RPJPN 2025-2045 divides national development into four phases over the next two decades, namely:

• transformation strengthening;
• transformation acceleration;
• global expansion; and
• the embodiment of Indonesia Gold 2045.

Through the RPJPN 2025-2045, Indonesia is making a bold statement: energy transition is central to its vision of becoming a developed nation by 2045.

Energy transition is embedded in each of the four phases as follows.

• First phase (2025-2029): carbon capture and storage/carbon capture, storage, and utilisation (CCS/CCUS), implementation and limitation of coal-fired power plant development, utilisation of energy storage system, development of renewable power plants, new energy policy development, widespread carbon credit implementation, alteration of fossil subsidy to renewables, electrification of household and vehicle, smart grid development, and extension of mandatory biofuel policy.
• Second phase (2030-2034): retirement of coal-fired power plants, biomass co-firing, implementation of CCS/CCUS in hard to abate sectors, preparation of low carbon hydrogen and ammonia infrastructures, ocean energy exploration, commissioning of the first nuclear power plant, expansion of renewable power plant capacities, smart grid expansion and grid interconnection, massive utilisation of electric vehicle and electric household, and extension of mandatory biofuel policy.
• Third phase (2035-2039): continued retirement of coal-fired power plants, expansion of renewable power plant capacities, expansion of nuclear power plants, pilot project development of ocean power plant, electricity utilisation and efficiency in the industry sector, and grid enhancement through interconnection and smart grid.
• Fourth phase (2040-2045): expansion of coal-fired power plant retirement, increase of renewable power plant capacity, expansion of low carbon hydrogen and ammonia for transportation and heavy machineries, commercial development of ocean power plants, and grid extension through interconnection and smart grid. 

The vicennial RPJPN 2025-2045 will serve as a directive for the future presidents to develop their quinquennial National Mid Term Development Plan (Rencana Pembangunan Jangka Menengah Nasional, or RPJMN). Therefore, the RPJPN will ensure Indonesian commitment to sustainable development beyond the current presidency for the next 20 years.   

The inclusion of energy transition milestones across all four phases of the RPJPN 2025-2045 underscores Indonesia’s serious and enduring commitment to a sustainable future. By embedding energy transition as a core component of its long-term development strategy, Indonesia signals to both domestic and international stakeholders that the shift to clean energy is not just a short-term policy choice but a foundational priority for the nation’s growth and resilience.   

ESG Integration in the Industry Sector

The industry sector has long embraced the principles of sustainability, evident through the integration of the green industry concept in the umbrella law of industry, namely Law No 3 of 2014. The Law defines green industry as industries that prioritise the efficiency and effectivity of natural resources sustainably in order to align industrial development with environmental functions as well as to provide benefit to the public. One of the primary manifestations of green industry is the “green industry standard” (standar industri hijau).

The green industry standard aims to establish a green standard for each economic activity, comprising:

• raw materials, auxiliary materials and energy;
• production processes;
• products;
• business management; and
• waste management.

The standard can either be voluntary or mandatory. Some of the standards issued by the Ministry of Industry are green industry standard for ceramic tile, textile, snack, fertiliser, and batik industries. Industrial companies meeting the green industry standard will receive a green industry certificate, symbolising their commitment to eco-friendly practices.

In a further step towards sustainable industrial development, the Indonesian government recently issued Government Regulation No 20 Year 2024 on Industrial Zoning that introduces the concept of an Eco-Industrial Park (kawasan industri berwawasan lingkungan). Eco-Industrial Park is a centralised industrial area equipped with supporting infrastructures and facilities to ensure sustainability through integrated social, economic and environmental aspects in location selection, planning, development and management.

The Regulation describes aspects of an Eco-Industrial Park, namely:

• area management;
• environmental management, consisting of energy utilisation, raw water utilisation, waste management and climate change;
• social, ie, prioritising social management systems and social infrastructures; and
• economic, consisting of job creation, economic value creation and access for small and medium industries.

Further regulation on the Eco-Industrial Park will be provided in a Minister of Industry Regulation, which is expected to provide detailed provisions on implementing and managing the Parks effectively. The introduction of an Eco-Industrial Park marks a significant step towards embedding ESG principles directly into industrial development, helping companies adopt more sustainable practices. Through the four aspects of an Eco-Industrial Park, the framework encourages industrial companies to reduce their carbon footprints, utilise renewable energy sources, and promote social inclusion and economic benefits for local communities.

The Latest Developments in Carbon Trading in Indonesia

The focus on carbon trading initiatives in Indonesia continues to grow rapidly. Since the issuance of Presidential Regulation No 98 of 2021 on the Implementation of Carbon Pricing to Achieve Nationally Determined Contribution Target and Control Over GHG Emissions in the National Development (PR 98/2021) as the umbrella regulation for carbon trading, Indonesia has laid a comprehensive regulatory foundation for carbon trading, such as Minister of Environment and Forestry Regulation No 21 of 2022 as the implementing regulation of PR 98/2021, sectoral regulations on carbon trading, particularly for the electricity and forestry sectors, and regulations on carbon exchange. A significant milestone was also achieved in October 2023 through the launch of the highly anticipated Indonesia carbon exchange (IDXCarbon). IDXCarbon aims to facilitate transparent carbon credit transactions and increase market participation among individuals and corporations.

The electricity sector has emerged as a frontrunner in this carbon trading initiative. According to data published by the Ministry of Energy and Mineral Resources, the emission ceiling for each unit of coal-fired power plants was established in 2023, which gave rise to carbon trading transactions among 42 companies. In 2023 alone, the Ministry of Energy and Mineral Resources claimed that carbon trading transactions amounted to 7.07 million tons of CO2, equating to IDR84.17 billion. However, the establishment of an emission ceiling for coal-fired power plant units and those carbon trading transactions are not yet recorded in the National Registry System for Climate Change Control as the integrated platform for carbon trading.

Moreover, as IDXCarbon celebrated its one-year anniversary in September 2024, the number of transactions conducted on the carbon exchange remains limited. Reports indicate that the transaction value on IDXCarbon can be considered as relatively low at IDR37 billion (IDN Times, 2024). This figure remains substantially below Indonesia’s potential for carbon credit, which is estimated at IDR3,000 trillion (CNBC, 2024). This underscores the need for governmental interventions, such as incentives or mandatory trading requirements to boost participation and realise the full potential of IDXCarbon. 

The plan to impose carbon tax in 2025 will also add another layer of momentum to Indonesia’s carbon market. According to Law No 7 of 2021 on the Harmonisation of Tax Regulations, carbon tax will first be imposed on coal-fired power plants. The Law established a floor price for the carbon tax at IDR30,000 per ton of CO2, a rate relatively lower than the carbon tax values recommended by the World Bank and the International Monetary Fund (IMF) for developing countries, which ranges from USD30 to USD100 per ton of CO2 (LPEM FEB UI, 2023). Though the tax rate may draw some criticism for its modest value, it is expected to catalyse greater participation in carbon trading, potentially setting a foundation for more robust pricing in the future.

The Issuance of Minister of Environment and Forestry Regulation on NDC Implementation

In September 2024, the Minister of Environment and Forestry issued Minister of Environment and Forestry Regulation No 12 of 2024 on the Implementation of Indonesia’s Nationally Determined Contribution (NDC). One notable aspect of this Regulation is the stipulation that the outcome of climate change mitigation and adaptation actions carried out under domestic and international co-operation for capacity building (as one of the strategies of NDC implementation) belongs to the person in charge of such actions. While the Regulation stops short of specifying exactly who qualifies as the “person in charge,” it represents an important step towards defining ownership rights over greenhouse gas emission reductions. This clarity fills a gap left by PR 98/2021, which did not specify entitlement to carbon credits generated through greenhouse gas emission reduction projects.

Additionally, the regulation clearly states that no transfer of carbon units abroad can occur for international co-operation projects for capacity building. Though not specifically aimed at carbon trading, this provision underscores the Ministry of Environment and Forestry’s stance that carbon credits generated within Indonesia should be retained to meet the nation’s own NDC targets. This aligns with the broader objective of prioritising domestic needs in emissions reduction and sustainable development, ensuring that Indonesia retains control over its carbon assets in pursuit of its climate commitments.

Moreover, the Regulation introduces a system of recognition to acknowledge stakeholders’ efforts in emissions reduction through two types of acknowledgments: (i) certificates of appreciation and (ii) letters of appreciation. The certificate of appreciation is awarded by the Ministry of Environment and Forestry to persons in charge of climate change mitigation and adaptation actions who reduce emissions beyond their obligations. Meanwhile, a letter of appreciation, granted by the relevant minister recognises partners contributing to climate change initiatives that involve international co-operation, especially where no carbon units are transferred abroad.

As Indonesia welcomes its eighth President on 20 October 2024, there is an increased need for public vigilance to ensure that ESG priorities, along with energy transition efforts, continue to be emphasised under the newly formed Red and White Indonesian Cabinet. While recent regulations lay the groundwork for a more sustainable Indonesia, their impact will largely depend on the steadfast commitment and actions of the new administration.

President Prabowo Subianto’s “Asta Cita Vision” includes a robust focus on green economic growth, underscoring his goal for Indonesia to become a “superpower” in renewable energy and bioenergy. Among his ambitious plans are the acceleration of net-zero emissions targets and advancements in carbon sink and offset initiatives. His agenda highlights a comprehensive overhaul of new and renewable energy policies to facilitate Indonesia’s transition to cleaner energy sources.

In a notable move to underscore sustainability as a priority, President Prabowo has decided to separate the Ministry of Environment and Forestry into two distinct entities: the Ministry of Environment/Environmental Control Agency and the Ministry of Forestry. This restructuring, which reverts to the structure in place before President Jokowi’s administration, aims to create more focused, responsive and strategically aligned ministries to tackle the complex and evolving challenges of environmental management and climate change impacts. The reformed Ministry of Environment is expected to serve as a central advocate for the green economy, ensuring that investment policies are aligned with sustainable development goals.

As Indonesia’s ESG and energy transition policies evolve under the new government, the nation’s commitment to sustainability will be tested. The direction taken by this administration will be crucial in determining whether Indonesia can both achieve its Indonesia Gold 2045 Vision and lead as a sustainable economic powerhouse in the region. Public scrutiny and engagement will play a vital role in holding the government accountable to its green vision, ensuring that the ideals of sustainability are transformed into tangible outcomes.