ESG Trend in Indonesia
1. What is ESG
The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate value and predict the future financial performance of companies.” ESG is also an important factor in the investment decision-making process. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report. ESG is used by investors to evaluate corporations and determine the future financial performance of companies.
In ESG, the category can be divided to:
Environmental: provides the indicator for prevention of natural world (climate change, carbon emission reduction, water pollution and water scarcity, air pollution and deforestation)
Social: provides the indicator for consideration of humans and our interdependencies (customer success, data hygiene and security, gender and diversity inclusion, community relations and mental health)
Governance: provides the indicator for logistics and defined processes for running a business or organization. a strengthened version of core and expanded disclosures relating to the governing purpose theme, reflecting broad-based feedback from both reporting organizations and investors (boards of directors, executive compensation guidelines, political contributions and lobbying, venture partner compensation, hiring and onboarding best practices).
2. How Important is ESG?
ESG investing is growing and changing. According to a report by PWC, the practice of ESG investing has grown over the last few years. Here’s the reason why ESG investing is constantly growing:
The world as we know it is changing.
The next generation of investors is changing the way investment works, millennials are likely more interested in investments that are related to solving societal, economic and environmental problems
Data and analytics have evolved to provide more information, which principles and criteria to ESG reporting. ESG data is becoming one of the most significant determinants in investor strategy
The implementation of ESG has a positive impact on the company's performance. Besides being able to improve business performance and increase the share price of issuers, the implementation of ESG can attract investors, expand the market, strengthen the company's brand, increase business networks, increase consumer loyalty, and open wider access to financing sources.
3. ESG trend in Indonesia
Indonesia has made noteworthy progress on reducing income inequality and improving law enforcement, but continues to face significant and persistent challenges in a number of ESG areas, including corruption, GHG emissions, gender imbalances and external food dependency. The growing awareness of the importance of ESG is projected to trigger a shift in the export structure in the long term. This is inseparable from the decarbonization that the Indonesian government has begun to implement.
The Indonesian Financial Services Authority (OJK) has led efforts around sustainable finance and green bonds framework. OJK has published phase II (2021-2025) of a sustainable finance roadmap, to identify and incorporate ESG risks. In 2017, OJK introduced regulation no. 60/POJK.04/2017 on the green bond framework to tell the requirements and process of green bonds in Indonesia. The Ministry of Finance has issued the sovereign green sukuk, which proceeds were allocated to renewable energy, energy efficiency, disaster risk reduction, waste to energy and sustainable transportation. In 2017, OJK introduced regulation no. 51/POJK.03/2017 about sustainable finance to financial services, where they are mandated to publish sustainability reports.
As for the Exchange Announcement No. Peng-00363/BEI.POP/12-2020 dated December 8, 2020, IDX has determined 30 stocks that have a good Environmental, Social, and Governance (ESG) assessment, are not involved in significant controversy, have transaction liquidity, and financial performance who are good, become the initial constituent of IDX ESG Leaders. This step is taken to develop sustainable investment and improve ESG practices in the Indonesian Capital Market. This is demonstrated by the joining of the IDX to become a member of the United Nations Sustainable Stock Exchange (SSE) Initiative from April 2019, and through various initiatives that have been outlined in the Sustainable Finance Action Plan. The launch of the IDX ESG Leaders Index is also to reinforce IDX's commitment to encourage ESG practices and become one of the milestones in implementing sustainable investment in Indonesia. The stock exchange authority confirmed that the IDX ESG Leaders Index was built based on an ESG risk assessment which measures the extent to which the Listed Company has implemented ESG, based on the risk exposure in each business field. IDX collaborates with Sustainalytics, a leading independent institution engaged in ESG research and corporate governance, in providing ESG data. The ESG data provided is in the form of an ESG risk assessment and controversy analysis which will be the basis for determining the constituents of the IDX ESG Leaders Index.
Perceptions in Asia are most favorable, with the highest levels of agreement found in Indonesia (81%), Vietnam (80%), and Thailand (79%). Investments based on the principles of Environment, Social, and Governance (ESG) have shown a significant increase in Indonesia. It will align with sustainability reporting demand. As mentioned before, the implementation of sustainability reporting is increasing year by year. Some regulations and guidance are implemented already. Future regulations are coming ahead such as carbon tax, green sukuk (green investment), etc. green investment is an investment that focuses on environmental, social, and good governance (ESG) aspects, intending to maintain the continuity of the economy and life on earth.
The SRI-KEHATI Index was the pioneer of ESG-based investment in Indonesia. KEHATI is a non-profit organization with the mandate to collect, manage and distribute grants for the conservation and sustainable use of biodiversity in Indonesia. the SRI-KEHATI Index is run based on world investment trends. This refers to investors’ considerations that focus not only on financial aspects but also on environmental, social, and sustainable development principles.
Sustainability Reporting is a “must-to have”, not just “nice-to have” document. Investors are searching for ESG investment, those situations can increase the demand of sustainability reporting. Indonesia has a lot of room to improve the regulations to make sustainability report, such as tax amnesty for companies which have implemented sustainability reporting. Every company in all sectors must be aware of this ESG investing, because it will become a trend. With the increasing trend of ESG Investment, as well as governmental push for sustainability, the need for Sustainability Reporting (and thus sustainability analysts and consultants), will also increase in Indonesia
Source:
https://insights.diligent.com/esg/
https://globescan.com/2020/10/14/rising-trust-sustainability-reporting/
https://www.idxchannel.com/market-news/kian-dilirik-investor-milenial-bei-siap-munculkan-indeks-esg-leader
https://investor.id/market-and-corporate/235564/industri-berwawasan-esg-bakal-jadi-tren-masa-depan%0B
https://www.arcolab.org/en/sustainability-reporting-important-for-businesses/
https://www.ojk.go.id/id/berita-dan-kegiatan/publikasi/Documents/Pages/Roadmap-Keuangan-Berkelanjutan-Tahap-II-%282021-2025%29/Roadmap Keuangan Berkelanjutan Tahap II %282021-2025%29.pdf
https://databoks.katadata.co.id/datapublish/2021/06/04/tren-menanjak-investasi-esg-di-indonesia
https://kehati.or.id/en/kehatis-efforts-to-promote-a-green-investment-climate-in-indonesia/
https://www.msci.com/documents/10199/03d6faef-2394-44e9-a119-4ca130909226
https://www.westernasset.com/au/qe/pdfs/whitepapers/esg-indonesia-case-study-2019-02.pdf
https://investor.id/market-and-corporate/242891/indonesia-tertinggal-di-bidang-esg
https://kumparan.com/kumparanbisnis/mulai-tahun-depan-seluruh-emiten-wajib-report-esg-1vPAuTYsgAk/4
