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Regulations of ESG Investing and Its Implementation in Indonesia 2023
Regulations of ESG Investing and Its Implementation in Indonesia 2023
Setyawati Fitrianggraeni, Reynalda Basya Ilyas, Deviana Bella Saputra, Febriana Dwi Hapsari[1]
1. What is the legal basis of ESG Investing in Indonesia?
ESG consists of Environment, Social, and Governance. Environmental factors cover the company’s relation with the physical environment, social factors concern the social impact of a company on society, and governance factors relate to how companies are governed.[1]
ESG becomes a crucial part of a company’s responsibility or sustainability. In 2006, Principles for Responsible Investment (PRI) was established with the support of The United Nations.[2] One point of the PRI is to provide clarity to investors to incorporate ESG issues into investment analysis and the decision-making process.[3]
Regulation on investment in Indonesia, among others can refer to the Financial Services Authority (OJK) as an institution that has the function of organizing an integrated regulatory and supervisory system for all activities in the financial services sector. In supporting the implementation of ESG, OJK has created the Sustainable Finance Roadmap in Indonesia in two phases, as follows:
a. Phase I (2015-2019)
Launched in December 2014, for OJK to realize ESG, this roadmap contains Strategic Activities to Implement Sustainable Finance for financial industries under the authority of OJK (banking, capital market and Non-Bank Financial Service Industry), which covers:[1]
- Increase the supply of environmentally friendly financing
- Increase demand for environmentally friendly financing products
- Increase oversight and coordination of sustainable finance implementation
b. Phase II (2019-2024)
Launched in January 2021, the Phase II Roadmap covers (i) Achievements of Sustainable Finance in Indonesia during the period of Phase I Roadmap (2015-2019)[2] and (ii) the development of sustainable financial initiative by integrating seven components (policy, products, market infrastructure, coordination among related Ministries/Institutions, non-governmental support, human resources, and awareness) in one ecosystem.[3]
In regards to the legal basis of ESG, there are two issued OJK Regulations, namely: (i) Sustainability Report[4] — OJK Regulation Number 51/POJK.03/2017 on The Implementation of Sustainable Finance for Financial Services Institutions, Issuers and Public Companies (“OJK Regulation 51/2017”) and (ii) Development of Green Bond in Indonesia[5] — OJK Regulation Number 60/POJK.04/2014 on Requirements of Green Bond Securities (“OJK Regulation 60/2017”)
First, on the Sustainability Report. ESG disclosure points are found in the sustainability report disclosed by the company.[1] To support the implementation of ESG, OJK Regulation 51/2017 obliged the Financial Service Institution (LJK), Issuers, and Public Companies to compile a Sustainability Report as an inseparable part of the Annual Report, to be submitted to OJK annually.[2] The Sustainable Report is published to the public and contains the performance of the economy, finance, social, and Environment of the relevant LJKs, Issuers, and Public Companies in running their sustainable business.[3] Violation of this provision shall be subject to administrative sanction in the form of reprimand or written warnings.[4]
Second, on Green Bond. OJK Regulation 60/2017 stipulates that the Green Bond offered to the public by the Issuers is only for financing and/or refinancing Environmentally Friendly Business Activities (KUBL)[5] aimed at protecting, restoring, and improving environmental quality or function.[6] At least 70% of the proceeds from Green Bond’s public offering must be used to finance KUBL.[7] Green Bond must obtain an Environmental Expert’s opinion or assessment that the issuance of Green Bond is beneficial to the environment.[8] The Issuers that issue Green Bonds can get incentives from OJK.[9]
Therefore, OJK Regulation 51/2017 and OJK Regulation 60/2017 are the legal basis that may be used as references that need to be considered by LJKs, Issuers, and Public Companies in implementing ESG investing in Indonesia
2. What are the examples of ESG Investing implementation in Indonesia?
There are at least four examples of ESG Investing implementation in Indonesia in the form of the stock index at the Indonesia Stock Exchange (IDX), i.e., SRI-KEHATI, IDXESGL, ESGS KEHATI and ESGQKEHATI.
Index (SRI)-KEHATI ― Sustainable and Responsible Investment Stocks launched by KEHATI Foundation (Keanekaragaman Hayati – Biodiversity) together with IDX on 8 June 2009 with reference to PRI. The SRI-KEHATI index is an indicator of stock price movements to be used as a guide for investors in investing in shares, where the issuers selected to be included in the SRI-KEHATI index are companies that care about the environment, corporate governance, care for the surrounding community and humans and have business behavior and business ethics that are acceptable at national and international levels. The selection of the list of companies included in SRI KEHATI is carried out twice a year through a selection process determined by the KEHATI Foundation and the Indonesian Stock Exchange.[1] Currently, the SRI-KEHATI Index consists of 25 stocks of public companies listed on the IDX.[2]
Second, Index IDXESGL ― Indonesia Stock Exchange ESG Leaders launched by IDX on 14 December 2022. This is an index that measures the price performance of stocks that have a good Environmental, Social, and Governance (ESG) assessment are not involved in significant controversy, and have transaction liquidity and good financial performance. The ESG assessment and controversy analysis were carried out by Sustainalytics.[3] This stock index contains a minimum of 15 and 30 max of selected stocks based on the lowest ESF risk score rating.[4]
Lastly, Index ESGS KEHATI ― ESG Sector Leaders IDX KEHATI and ESGQ KEHATI ― ESG Quality 45 IDX KEHATI. Both were launched by KEHATI Foundation with IDX on 20 December 2021. ESGS KEHATI is an index containing stocks with ESG performance assessment results that are above the sector average and have good liquidity. Industrial classification refers to the IDX Industrial Classification (IDX-IC).[1] ESGS KEHATI contains stocks with ESG performance appraisals above the industry average.[2] ESGQ KEHATI is an index consisting of the 45 best stocks from the result of the company’s sustainability and financial work assessment and has good liquidity to be traded as index constituents.[3] ESGQ KEHATI offers a combination of ESG factors and financial quality factors in the selection of its constituents. These two indexes were formed to complement SRI-KEHATI.
[1] Indonesia Stock Exchange, ‘Panduan Indeks IDX ESG Sector Leaders IDX KEHATI’ | The Guidelines for Index I IDX ESG Sector Leaders IDX KEHATI’ (December 2021) < https://www.idx.co.id/media/11193/3-lampiran-panduan-indeks-esgskehati_revapr22.pdf > pp. 1 accessed on 12 September 2023
[2] KEHATI ‘ESG Sector Leaders IDX KEHATI’ < https://kehati.or.id/en/esg-sector-leaders-idx-kehati/> accessed on 24 August 2023
[3] KEHATI ‘Index ESG Quality 45 IDX KEHATI’ <https://kehati.or.id/en/esg-quality-45-idx-kehati/ > accessed on 24 August 2023
[1] Setyawati Fitrianggraeni holds the position of Managing Partner at Anggraeni and Partners in Indonesia. She also serves as an Assistant Professor at the Faculty of Law, University of Indonesia, and is currently pursuing a PhD at the World Maritime University in Malmo, Sweden. Additionally, Reynalda Basya Ilyas is a Senior Associate, Deviana Bella Saputra is a Junior Associate, and Febriana Dwi Hapsari is a License Specialist at Anggraeni and Partners. The writers express their gratitude to Dr. Hary Elias for generously dedicating his time to provide valuable feedback on their article.
[2] Financial Services Commission of Ontario ‘Environmental, Social, and Governance Factors’ (2016) < https://www.fsrao.ca/media/8311/download> accessed on 24 August 2023
[3] Principles of Responsible Investment, ‘How did the PRI Start?’ < https://www.unpri.org/about-us/about-the-pri#:~:text=How%20did%20the%20PRI%20start,the%20Principles%20for%20Responsible%20Investment.> accessed on 24 August 2023
[4] Principles of Responsible Investment, ‘What are the Six Principles for Responsible Investment?’ <https://www.unpri.org/about-us/about-the-pri#:~:text=How%20did%20the%20PRI%20start,the%20Principles%20for%20Responsible%20Investment.> accessed on 24 August 2023
[5] Financial Services Authority, ‘Roadmap for Sustainable Finance in Indonesia’ (December 2014) < https://www.ojk.go.id/Files/box/keuangan-berkelanjutan/roadmap-keuangan-berkelanjutan.pdf > pp. 19 accessed on 24 August 2023
[6] Financial Service Authorities, ‘Sustainable Finance Roadmap Phase II: 2021-2025’ (January 2015) < https://ojk.go.id/id/berita-dan-kegiatan/publikasi/Documents/Pages/Roadmap-Keuangan-Berkelanjutan-Tahap-II-(2021-2025)/Roadmap%20Keuangan%20Berkelanjutan%20Tahap%20II%20(2021%20-%202025).pdf > pp. 18 accessed on 24 August 2023
[7] Ibid. pp. 22-23
[8] Financial Services Authority, ‘Roadmap for Sustainable Finance in Indonesia’ (December 2014) < https://www.ojk.go.id/Files/box/keuangan-berkelanjutan/roadmap-keuangan-berkelanjutan.pdf > pp. 28 accessed on 24 August 2023
[9] Ibid. pp. 29
[10] Maria Rengganis, ‘Pengaruh Pengungkapan Environmental, Social and Governance (ESG) terhadap Kinerja Keuangan Perusahaan Indonesia’ | The Impact of Environmental, Social and Governance (ESG) Disclosures on the Financial Performance of Indonesian Companies’ (Magister Thesis, Atmajaya University 2019) pp. 6
[11] OJK Regulation 51/2017, Article 10
[12] OJK Regulation 51/2017, Article 1 para 13
[13] OJK Regulation 51/2017, Article 13
[14] POJK 60 /2017, Article 2 in conjunction with Article 3(1)
[15] POJK 60 /2017, Article 1 para 3
[16] POJK 60 /2017, Article 8
[17] POJK 60 /2017, Article 5
[18] POJK 60 /2017, Article 17
[19] Vera Intanie Dewi and Felisca Oriana ‘Indeks SRI-KEHATI dan Reaksi Harga Saham Emiten Terhadap Pengumuman Indeks SRI-KEHATI (Studi Kasus pada Indeks SRI-KEHATI) | SRI-KEHATI Index and Reaction of Issuer Stock Prices to the Announcement of the SRI-KEHATI Index (Case Study on the SRI-KEHATI Index)’ (Research Report, Catholic University of Parahyangan, 2014) https://journal.unpar.ac.id/index.php/Sosial/article/view/1225 accessed on 9 September 2023
[20] KEHATI, Indekx SRI-KEHATI < https://kehati.or.id/en/index-sri-kehati/> accessed on 2 August 2023
[21] Indonesia Stock Exchange, ‘Panduan Indeks IDX ESG Leaders’ | The Guidelines for Index IDX ESG Leaders (November 2020) < https://www.idx.co.id/media/9408/lampiran-panduan-indeks-idx-esg-leaders-v1_1.pdf> pp. 1 accessed on 12 September 2023
[22] Ibid., pp. 2
[23] Indonesia Stock Exchange, ‘Panduan Indeks IDX ESG Sector Leaders IDX KEHATI’ | The Guidelines for Index I IDX ESG Sector Leaders IDX KEHATI’ (December 2021) < https://www.idx.co.id/media/11193/3-lampiran-panduan-indeks-esgskehati_revapr22.pdf > pp. 1 accessed on 12 September 2023
[24] KEHATI ‘ESG Sector Leaders IDX KEHATI’ < https://kehati.or.id/en/esg-sector-leaders-idx-kehati/> accessed on 24 August 2023
[25] KEHATI ‘Index ESG Quality 45 IDX KEHATI’ <https://kehati.or.id/en/esg-quality-45-idx-kehati/ > accessed on 24 August 2023
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