Loading...
The More, The Merrier: What Increased ESG Standards Mean To Indonesia’s Energy Transition In Mining Industry
Setyawati Fitrianggraeni, Fildza Nabila Avianti, Sri Purnama
INTRODUCTION
The imperative for a sustainable transition to renewable energy sources has never been more pressing in Indonesia’s evolving energy landscape. Inherently intertwined with Environmental, Social, and Governance (ESG) principles, this transition requires a robust legal and regulatory framework to ensure its success. The recent issuance of Presidential Regulation Number 60 of 2023 on National Strategy of Business and Human Rights (PR 60/2023), to further promote, protect, and respect human rights in business activities. This regulation includes, establishing obligations of related Ministries, Institutions, and Regional Governments to protect human rights in business activities; the responsibility of business actors to respect human rights; access to redress for victims of alleged human rights violations in business activities; special funds for implementing the National Strategy; and establishing a task force for human rights due diligence. Attached to the regulation is guidelines for institutions to carry out planning, implementation and monitoring of business and human rights and guidelines for business actors and other stakeholders to increase respect of human rights. The regulation marks a significant step towards integrating business and human rights, including ESG principles into the nation’s energy policies. Nevertheless, the question remains: To what extent does Indonesia’s current legal framework support ESG compliance, particularly in high-risk sectors such as mining?
This article aims to dissect the alignment—or lack thereof—between Indonesia’s energy transition trajectory, its investment-leaning policies, and the existing ESG regulatory environment. By narrowing our focus to the mining industry, we endeavour to uncover potential regulatory gaps, oversight challenges, and environmental and workplace safety standards variances that may hinder the nation’s path towards sustainable development. Through this analysis, we seek to evaluate Indonesia’s readiness to embrace ESG principles and propose pragmatic solutions for enhancing its legal infrastructure to support a greener, more responsible energy future.
ESG REGULATIONS AND THE MINING INDUSTRY IN INDONESIA
ESG principles have become increasingly significant in the mining sector globally,[1] with Indonesia being no exception. Given the sector’s substantial impact on the economy[2] and the environment, the country’s efforts to align its mining industry with ESG standards are crucial. This discussion delves into the regulatory landscape governing ESG in the Indonesian mining industry, focusing on the recent PR 60/2023 and the practical implications of ESG integration within the sector.
Impact of Presidential Regulation Number 60 of 2023 on National Business Strategy and Human Rights
The National Strategy for Business and Human Rights (NSBHR), that is regulated through PR 60/2023,[3] aims to showcase Indonesia’s human rights and ESG compliance commitment. The main purpose of this regulation is to establish that business operators must respect human rights in conducting their commercial activities. As the main reference that directs national policy into, NSBHR containing strategies and steps to be used as a reference by ministries, institutions, local governments, business actors, and other stakeholders for the advancement of the business world, considering the protection, respect, and remediation of human rights.[4]
PR 60/2023 focuses on achieving sustainable development, enhancing economic efficiency, and protecting human rights within Indonesia’s business sector. Below are critical impacts on businesses, as derived from the regulation:
- Legal Framework for Human Rights in Business. The regulation outlines an NSBHR, which directs ministries, government agencies, regional governments, businesses, and other stakeholders to integrate human rights into their operations.[5] This integration ensures that economic development through industrial and business activities is balanced with the need to respect and protect human rights, aligning with global sustainability and ethical standards.
- Economic Growth and ESG Standards. By mandating business entities respect and rehabilitate human rights, the regulation ensures that Indonesia’s rapid economic and energy transition does not compromise on ESG standards. This is critical as businesses significantly influence environmental impact and social welfare.[6] The regulation likely encourages businesses to adopt sustainable practices, invest in clean energy, and improve social welfare, making Indonesian businesses more attractive globally, especially in markets where ESG compliance is valued.[7]
- Enhanced Corporate Responsibility and Accountability. Businesses must implement human rights due diligence processes to identify, prevent, mitigate, and account for how they address their impacts on human rights.[8] This includes providing remediation for any human rights abuses they cause or to which they contribute.[9] The regulation promotes transparency and accountability, enhancing stakeholders’ trust and potentially leading to better investment and financing conditions for compliant companies.
- Strengthened Institutional Framework. Creating national (National BHR)[10] and regional (Regional BHR)[11] task forces to oversee and implement the strategy ensures that the human rights in business agenda is uniformly applied across different regions and sectors. These task forces will coordinate, monitor, and evaluate the implementation of the human rights standards in business operations, ensuring that the policies are effectively enforced and adapted as needed.[12]
Incentives for Businesses when Adhering to ESG Standards
Several mining companies have emerged as frontrunners in ESG integration, setting benchmarks for the industry. These companies have successfully navigated the challenges of incorporating ESG principles into their operations, demonstrating that sustainability and profitability can go hand in hand.
One notable example is in 2023, PT Merdeka Copper Gold Tbk achieved an A rating from ESG Morgan Stanley Capital Indonesia, becoming the only Indonesian mining company in the MSCI Diversified Metals and Mining category to receive such a rating.[13] Recognising this ESG rating by a prestigious global institution like MSCI undoubtedly enhances the company’s international reputation.
Implementing ESG can provide external benefits, such as significantly reducing carbon emissions and tangible financial advantages.[14] According to PwC’s 18th Annual Review, the top 40 mining companies with higher ESG ratings saw a 15% increase in net profit, a 40% increase in cash on hand, and a nearly two-thirds rise in market capitalisation to US$1.46 trillion. The survey also revealed that coal production by these top 40 mining companies dropped by 12% in 2020. Transactions decreased from five in 2018 to none in 2019 and 2020, highlighting the ongoing shift in this sector towards achieving net zero emissions.[15]
Internally, the implementation of ESG also provides several benefits, including enhancing company performance, identifying risks and business innovations, improving company reputation, seizing business opportunities, enhancing management quality through transparency, maintaining long-term business sustainability, and supporting financial performance.[16] Furthermore, mining companies with higher ESG ratings outperformed the broader market during the peak of the COVID-19 crisis, delivering an average total shareholder return of 34% over the past three years. This return is ten percentage points higher than the general market index.[17]
ALIGNING INVESTMENT POLICIES WITH ESG STANDARDS
The transition towards renewable energy and integrating ESG principles into investment policies represent a paradigm shift in evaluating and executing investments. This section examines the interplay between international ESG standards and Indonesian policy, alongside the inherent challenges and opportunities for investors within the renewable energy and mining sectors.
The Role of International Standards in Shaping Policy
International ESG standards and frameworks are pivotal in shaping national policies, especially for countries like Indonesia, which are transitioning towards renewable energy. These standards serve as benchmarks for sustainable and socially responsible investments, guiding policymakers in developing regulations that promote environmental stewardship, social welfare, and sound governance. The establishment of PR 60/2023 was also inspired by the international guidelines from the document titled ‘Guiding Principles on Business and Human Rights: Implementing the UN Protect, Respect and Remedy Framework.’ This document later received endorsement from the UN Human Rights Council through Resolution A/HRC/RES/1714, which the Secretary-General’s Special Representative presented on the issue of human rights and transnational corporations and other business enterprises (SRSG).[18] This instrument encompasses three important pillars. The first pillar is that the state is obliged to protect human rights. The second pillar is that business actors have the responsibility to respect human rights. The third pillar is that victims of human rights violations have the right to access effective, legal, accessible, certain, fair, transparent and accountable remedies, both through judicial and non-judicial mechanisms.
For Indonesia, aligning investment policies with ESG standards means incorporating guidelines and practices that are recognised globally, such as Principles for Responsible Investment (PRI).[19] These benchmarks provide a template for crafting policies that attract sustainable investments and ensure that these investments contribute positively to the country’s environmental and social objectives.
PRI outlines six key commitments that integrate ESG issues into investment analysis and decision-making, engage in active ownership, seek ESG disclosures from investees, promote the industry’s principles, collaborate to improve implementation effectiveness, and report progress.[20] Investors following the PRI principles are expected to report their ESG activities and impact.
Furthermore, human rights principles are also highlighted by the United Nations Guiding Principles to be used as a guideline.[21] PR 60/2023 already highlights the importance of reporting, monitoring, and evaluation to ensure the implementation of all actions and the achievement of the objectives of NSBHR. Additionally, an appendix in PR 60/2023 includes a Matrix for Business and Human Rights Action.[22] However, there are several potential gaps between PR 60/2023 with the United Nations Guiding Principles that needs to be considered.
First, human rights due diligence, on United Nations Guiding Principles stated that businesses are required to have mechanisms in place to identify, prevent, mitigate, and account for how they address their impacts on human rights,[23] but on PR 60/2023 lacks explicit requirements for ongoing human rights due diligence processes. Second, remediation, according to United Nations Guiding Principles, businesses should not only prevent and mitigate human rights risks but also remediate any adverse human rights impacts they cause or to which they contribute,[24] but a gap might exist if PR 60/2023 does not include clear pathways for remediation for those impacted by business operations. Last, transparency and reporting on PR 60/2023 does not require detailed reporting on human rights practices and impacts; it would not align well with the UN principles’ demands for transparency. The three concerns above are the things that Indonesian government need to pay attention to regulate the collaboration between business with human rights.
CONCLUSION
PR 60/2023 aims to create a balanced approach to Indonesia’s rapid energy transition by embedding higher ESG standards into the core of business operations. This fosters a more sustainable and responsible business environment and positions Indonesia favourably in the global economy, adhering to international human rights and environmental standards. ESG compliance within the mining sector is especially pivotal for a sustainable and responsible energy transition. This approach supports environmental sustainability by minimising ecological damage, promoting the efficient use of resources, and enhancing social welfare through better labour practices and community engagement. Improved governance quality, including transparency and accountability, further strengthens the sector’s compliance with international standards and builds investor confidence. PR 60/2023 is a reasonable effort for Indonesia to balance its economic growth with environmental protection and social responsibility, thereby supporting broader national and global sustainability goals.
REFERENCES
Journals
Jian Ye and Wenhua Xu, “Carbon Reduction Effect of ESG: Empirical Evidence From Listed Manufacturing Companies in China”, Frontiers in Ecology and Evolution, Vol. 11, 2023.
Regulations
Presidential Regulation Number 60 of 2023 on National Strategy of Business and Human Rights
Websites
Denis Riantiza Meilanova, “PwC: Kinerja Perusahaan Tambang Patuh ESG”, <https://www.pwc.com/id/en/media-centre/pwc-in-news/2021/indonesian/pwc-kinerja-perusahaan-tambang-patuh-esg.html> accessed 20 April 2024.
Krisna Sanarta, “Mengenal ESG dan Manfaatnya bagi Perusahaan”, <https://rcs.hukumonline.com/insights/esg> accessed 20 April 2024.
Merdeka Copper Gold, “Peringkat ESG MSCI Merdeka Naik Menjadi A: Tertinggi dalam Industri Pertambangan Indonesia”, <https://merdekacoppergold.com/peringkat-esg-msci-merdeka-naik-menjadi-a-tertinggi-dalam-industri-pertambangan-indonesia/> accessed 20 April 2024.
PRI, “What are the Principles for Responsible Investment?”, https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment accessed 21 April 2024.
PwC, “ESG in Indonesia: Access to Finance”, <https://www.pwc.com/id/en/esg/esg-in-indonesia-2023.pdf>, accessed 20 April 2024.
PwC, “Perusahaan Pertambangan dengan Peringkat ESG yang Lebih Tinggi Akan Mengungguli Pasar”, <https://www.pwc.com/id/en/media-centre/press-release/2021/indonesian/perusahaan-pertambangan-dengan-peringkat-esg-yang-lebih-tinggi-akan-mengungguli-pasar.html> accessed 20 April 2024.
Susannah Davies and Jo Hewitt, “Global: Environmental, Social and Governance (ESG) considerations for the mining sector Increasing reporting obligations and investor expectations”, <https://insightplus.bakermckenzie.com/bm/attachment_dw.action?attkey=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQJsWJiCH2WAUuQVQjpl3o%2BUTKkJtbUFRZ&nav=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQbuwypnpZjc4%3D&attdocparam=pB7HEsg%2FZ312Bk8OIuOIH1c%2BY4beLEAesZU6%2BAOS%2B7g%3D&fromContentView=1> accessed 20 April 2024.
[1] Husnah, “Integrating Environmental, Social, and Governance (ESG) Disclosure on Financial Performance of Indonesian Mining Industry Sector”, Jurnal Aplikasi Manajemen dan Bisnis, Vol. 9, No. 3, September 2023, p. 764.
[2] Ibid., p. 770.
[3] Article 2 Para. (1) of Presidential Regulation Number 60 of 2023 on National Strategy of Business and Human Rights (PR 60/2023).
[4] Article 1 (2) of PR 60/2023.
[5] Article 2 Para. (2) of PR 60/2023 stated:
“NSBHR Arrangements as referred to in paragraph (1) includes:
- The obligations of ministries/agencies and Regional Governments to protect human rights in business activities;
- The responsibility of Business Actors to respect human rights; and
- Access to remediation for victims of alleged human rights violations in business activities.”
[6] Point c Consideration of PR 60/2023.
[7] Appendix Point B of PR 60/2023.
[8] Appendix Point A of PR 60/2023.
[9] Ibid.
[10] Article 1 (3) of PR 60/2023.
[11] Article 1 (4) of PR 60/2023.
[12] Article 5 of PR 60/2023 stated:
“The National BHR, as referred to in Article 4, paragraph (1), has the following responsibilities:
- Propose drafts for BHAM Action plans;
- Coordinate and harmonize the implementation of the National BHAM Strategy at national and regional levels;
- Coordinate the monitoring and evaluation of the implementation of the National BHAM Strategy at national and regional levels; and
- Report the results of the BHAM Action implementation to the Minister.”
Article 7 Para. (5) of PR 60/2023 stated:
“The Regional BHR, as referred to in paragraph (1), has the following responsibilities:
- Coordinate and harmonize the implementation of the NSBHR at the regional level;
- Conduct monitoring and evaluation of the implementation of the NSBHR at the regional level; and
- Report the results of the BHR Action implementation to the National BHR.”
[13] Merdeka Copper Gold, “Peringkat ESG MSCI Merdeka Naik Menjadi A: Tertinggi dalam Industri Pertambangan Indonesia”, <https://merdekacoppergold.com/peringkat-esg-msci-merdeka-naik-menjadi-a-tertinggi-dalam-industri-pertambangan-indonesia/> accessed 20 April 2024.
[14] Jian Ye and Wenhua Xu, “Carbon Reduction Effect of ESG: Empirical Evidence From Listed Manufacturing Companies in China”, Frontiers in Ecology and Evolution, Vol. 11, 2023, p. 11.
[15] PwC, “Perusahaan Pertambangan dengan Peringkat ESG yang Lebih Tinggi Akan Mengungguli Pasar”, <https://www.pwc.com/id/en/media-centre/press-release/2021/indonesian/perusahaan-pertambangan-dengan-peringkat-esg-yang-lebih-tinggi-akan-mengungguli-pasar.html> accessed 20 April 2024.
[16] Krisna Sanarta, “Mengenal ESG dan Manfaatnya bagi Perusahaan”, <https://rcs.hukumonline.com/insights/esg> accessed 20 April 2024.
[17] Denis Riantiza Meilanova, “PwC: Kinerja Perusahaan Tambang Patuh ESG”, <https://www.pwc.com/id/en/media-centre/pwc-in-news/2021/indonesian/pwc-kinerja-perusahaan-tambang-patuh-esg.html> accessed 20 April 2024.
[18] Appendix Point A of PR 60/2023.
[19] In 2006, UN-PRI was founded, which aims to encourage the publication of rules and standards regarding ESG that increase the urgency of ESG as one of the main corporate agendas. See, Maria R. N. R., “Panduan ESG”, Kamar Dagang dan Industri Indonesia, Jakarta: November 2023, p. 1, https://www.slideshare.net/slideshow/buku-panduan-esg-kadin-indonesia-2023pdf/265889538 accessed 9th May 2024.
[20] See, PRI, “What are the Principles for Responsible Investment?”, https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment accessed 21 April 2024.
[21] United Nations Human Rights, “Frequently Asked Questions About The Guiding Principles On Business And Human Rights”, United Nations Publication, 2014, https://www.ohchr.org/sites/default/files/Documents/Publications/FAQ_PrinciplesBusinessHR.pdf accessed 9th May 2024.
[22] Appendix Point H of PR 60/2023.
[23] Guiding Principles 17-21. See, United Nations Human Rights, “The Corporate Responsibility to Respect Human Rights”, United Nations, 2012, https://www.ohchr.org/sites/default/files/Documents/Publications/HR.PUB.12.2_En.pdf accessed 9th May 2024.
[24] Guiding Principle 22, 29, and 31. See, Ibid.
DISCLAIMER :
This disclaimer applies to the publication of articles by Anggraeni and Partners. By accessing or reading any articles published by Anggraeni and Partners, you acknowledge and agree to the terms of this disclaimer:
No Legal Advice: The articles published by Anggraeni and Partners are for informational purposes only and do not constitute legal advice. The information provided in the articles is not intended to create an attorney-client relationship between Anggraeni and Partners and the reader. The articles should not be relied upon as a substitute for seeking professional legal advice. For specific legal advice tailored to your individual circumstances, please consult a qualified attorney.
Accuracy and Completeness: Anggraeni and Partners strives to ensure the accuracy and completeness of the information presented in the articles. However, we do not warrant or guarantee the accuracy, currency, or completeness of the information. Laws and legal interpretations may vary, and the information in the articles may not be applicable to your jurisdiction or specific situation. Therefore, Anggraeni and Partners disclaims any liability for any errors or omissions in the articles.
No Endorsement: Any references or mentions of third-party organizations, products, services, or websites in the articles are for informational purposes only and do not constitute an endorsement or recommendation by Anggraeni and Partners. We do not assume responsibility for the accuracy, quality, or reliability of any third-party information or services mentioned in the articles.
No Liability: Anggraeni and Partners, its partners, attorneys, employees, or affiliates shall not be liable for any direct, indirect, incidental, consequential, or special damages arising out of or in connection with the use of the articles or reliance on any information contained therein. This includes, but is not limited to, loss of data, loss of profits, or damages resulting from the use or inability to use the articles.
No Attorney-Client Relationship: Reading or accessing the articles does not establish an attorney-client relationship between Anggraeni and Partners and the reader. The information provided in the articles is general in nature and may not be applicable to your specific legal situation. Any communication with Anggraeni and Partners through the articles or any contact form on the website does not create an attorney-client relationship or establish confidentiality.
By accessing or reading the articles, you acknowledge that you have read, understood, and agreed to this disclaimer. If you do not agree with any part of this disclaimer, please refrain from accessing or reading the articles published by Anggraeni and Partners.
For further information, please contact:
WWW.AP-LAWSOLUTION.COM
P: 6221. 7278 7678, 72795001
H: +62 811 8800 427
S.F. Anggraeni
Managing Partner
Fildza Nabila Avianti
Senior Research Associate Ocean Maritime
Sri Purnama
Junior Legal Research Analyst
Research Group Transnational Litigation and Tort Law
