Introduction

​

On 22 April 2016, the Government of Indonesia signed the Paris Agreement to the United Nations Framework Convention on Climate Change on 22 April 2016 and enacted Law No. 16/2016 regarding the Ratification of the Paris Agreement to the United Nations Framework Convention on Climate Change, which came into force on 25 October 2016. By ratifying the Paris Agreement, Indonesia will obtain benefits including:

​

• Increased protection of Indonesian areas that are highly vulnerable to the impacts of climate change through climate change mitigation and adaptation.

• Increased recognition of national commitments in reducing emissions from various sectors, conserving forests, increasing renewable energy, and involving local communities and indigenous peoples in controlling climate change.

• Enable national participation (through voting rights) in making decisions related to the Paris Agreement, including in the development of procedures and guidelines for implementing the Paris Agreement. 

• Gain facilities to access funding sources, technology transfer, and capacity building for the implementation of mitigation and adaptation actions.

​

As a general outlook, ESG disclosure requirements in Indonesia are primarily applicable to the publicly listed companies and financial institutions under the supervision of OJK. Only private companies engaged in natural resources sector are required to prepare a corporate social and environmental plan. Meanwhile, all other private companies are only obliged to incorporate the information on their implementation of corporate social and environmental responsibility programs in the annual reports. 

​

The obligations of business actors to implement social and environmental responsibility are generally outlined in Law 40/2007. As a follow-up, the Government then issued GR 47/2012 to provide guidance for business actors in implementing aspects of social and environmental responsibility within their respective sectors. The regulation of social and environmental responsibility is intended to: (i) enhance the awareness of business entities regarding the implementation of social and environmental responsibility in Indonesia; (ii) meet the evolving legal needs in society regarding social and environmental responsibility; and (iii) strengthen the regulation of social and environmental responsibility as stipulated in various laws and regulations, in accordance with the business activities of the respective companies.

​

ESG Provisions for Listed Companies and Financial Services Institutions

​

The principles of sustainable finance must be implemented by Indonesian LJKs, issuers and public companies as a comprehensive support from financial services sector to create sustainable growth through alignment of economic, social and environmental interest.  In implementing sustainable finance, LJK is obliged to prepare and submit a sustainable financial action plan to OJK.  Such sustainable finance action plan shall be prepared based on the priority of the respective LJKs encompassing: (i) the development of its sustainable financial products and/or services including the increase of financing portfolio, investment or subscription at any financial instrument or project which is in line with the implementation of sustainable finance; (ii) the development of the relevant LJKs’ internal capacity; or (iii) adjustments to the organization, risk management, governance, and/or standard operating procedure of the LJKs in accordance with the principles of sustainable finance implementation.  

​

OJK Reg. No. 51/2017 further stipulates that LJKs obligated to carry out CSR shall allocate part of its CSR fund to support activities in implementing sustainable finance.  This can take the form of: (i) distribution of fund to viable micro business that lack access to funding from any LJK, with guidance toward development of sustainable business; (ii) provide training for prospective customers on sustainable business; (iii) conduct campaigns on sustainable production and consumption); and (iv) provide subsidies on insurance premiums for farmers, fishermen, as well as low-income society which is vulnerable to disasters.  Meanwhile, issuers and public companies which are not an LJK but obligated to carry out CSR may allocate part of its CSR fund to support activities in implementing sustainable finance. 

​

The above CSR fund allocation shall be described further in the sustainability report, which shall be prepared and submitted by LJKs, issuers and public companies to OJK every year no later than the deadline for submitting annual reports that applies to each LJK, issuer and public company.  The sustainability report itself must at least include the following information: 
 

• Sustainable strategies;

• Summary of sustainability efforts (economic, social and environmental);

• Brief company profile;

• Board of directors’ remarks;

• Sustainable governance;

• Sustainable performance;

• Written verification of the report and its information from independent parties, if any;

• Readers’ feedback, if any; and

• Company response to feedback in previous year’s report.

 

ESG Provisions for Private Companies​

​

• Business Entities’ Social and Environmental Responsibility

​​

​Companies engaged in activities related to or within the natural resources sector is obliged to fulfill Social and Environmental Responsibility – a commitment to participate in sustainable economic development to improve the quality of life and the environment for the benefit of the company, the local community, and society at large.  Social and Environmental Responsibility by the business entity is intended as a form of the company's participation in sustainable social development and aimed to: (i) address social issues and meeting the needs of social welfare services; and (ii) enhance the image and profitability, as well as ensuring the sustainability of the business entity.  The implementation scope of Social and Environmental Responsibility by business entity, at the very least, is in the following areas: 

​

1. social welfare;

2. education;

3. health;

4. arts and culture;

5. religious affairs;

6. entrepreneurship;

7. infrastructure; and 

8. environment.

 

In addition, the targets of Social and Environmental Responsibility by the business entity are intended for individuals, groups, or communities experiencing inhumane living conditions, such as in poverty, disabilities, and victim of disaster.  

​

Social and Environmental Responsibility is implemented by the Board of Directors based on the annual work plan of the company after obtaining approval from the BoC or the GMS, in accordance with the company's AoA, unless otherwise specified in the prevailing regulations.  Further, Social and Environmental Responsibility can be implemented: 

 

1. directly by the business entity;

2. through third parties;

3. partnering with the community; and/or

4. collaborating with other businesses in the form of a consortium,

​​

both within and outside the business entity's environments. 

​

1. Social and Environmental Responsibility within the Business Entity

​

This responsibility is related to the commitment and efforts of a business entity to meet the needs of its employees and their families as the specified targets.  The scope within the business entity in this regard includes: (i) providing basic social services to employees and their families; and (ii) implementing social protection and guarantees for employees and their families.  

​

   2. Social and Environmental Responsibility Outside the Business Entity

​

This responsibility is related to a business entity's commitment to enhance the social welfare of the community in the surrounding area of the business entity and on a national level.  Responsibilities carried out outside the scope of the business entity include: 

​

• Prioritizing employment opportunities for the local community around the business entity according to the needs and requirements of the business entity;

• Providing empowerment, guarantees, protection, or social rehabilitation to those in need of social welfare services around the business entity;

• Assisting in the environmental facilities and infrastructure of the community around the business entity; and

• Developing the potential of human resources surrounding the business entity.

​​

• Role of Business Actors in Environmental Protection and Management

​​

The aim of business actors’ role in environmental and forestry protection and management is to enhance business actors' awareness in empowering communities, protecting and managing natural resources.  The implementation of environmental and forestry protection and management by business actors can be in the form of:  

​

1. providing assistance and facilitation to communities; 

2. enhancing the capacity and strengthening the institutions of communities; and

3. engaging in guiding and leadership activities for the younger generation. 

​​

• Business Entities’ Social and Environmental Responsibility Forum

​​

To encourage, coordinate, facilitate, and synergize the implementation of Social and Environmental Responsibility by business entities, a Social and Environmental Responsibility Forum is established by the virtue of MoS Reg. No. 9/2020.  The Social and Environmental Responsibility Forum is responsible to: 

​

1. Build understanding and partnerships with businesses and communities to enhance social welfare.

2. Provide data and information to businesses and stakeholders within the forum regarding the types and issues of social concerns related to their field and the programs addressing them.

3. Encourage and invite businesses to actively contribute to the success of improving community welfare.

4. Provide assistance, advocacy, recommendations, and facilitation to businesses in implementing Social and Environmental Responsibility.

​

Related businesses are obliged to become members of the forum, which has 3 (three) levels: (i) a national-level forum based in the capital city and carried out by the national management; (ii) a provincial-level forum based in the provincial capital and carried out by the provincial regional management; and (iii) a district/city-level forum based in the district/city capital and carried out by the district/city regional management. 

 

Decarbonization

​

The Government of Indonesia signed the Paris Agreement to the United Nations Framework Convention on Climate Change on 22 April 2016 in New York, United States of America, and enacted Law 16/2016 on the Ratification of the Paris Agreement to the United Nations Framework Convention on Climate Change (effective as of 25 October 2016).

​

Furthermore, according to Article 1 para. (2) PR 98/2021, the Carbon Economic Value or Nilai Ekonomi Karbon (“CEV”) is a value attributed to each unit of greenhouse gas (GHG) emissions produced from human and economic activities. The administration of CEV is determined by the MoEF by taking into consideration: (i) the NDC roadmap; (ii) sectoral NDC target achievement strategies; (iii) GHG emission upper limits; (iv) time effectiveness and cost efficiency; and (v) advancements in science, technology, and sectoral capacity. 

​

One of the implementation method for CEV administration is through carbon trading mechanism that can take place in domestic and/or international trading. The fundamental elements in implementing carbon trading encompasses: 

 

1. Mechanisms and procedures of emission trading;

2. Mechanisms and procedures of GHG emission offset;

3. Utilization of domestic carbon trading revenue by the state;

4. Mechanisms and procedures of approval and registration;

5. Profit-sharing from trading;

6. Guidelines for the implementation of carbon trading; and

7. Transfer of carbon rights status within the country, conducted through the registration mechanism of the National Registry System for GHG Mitigation Activities or Sistem Registrasi Nasional Pengendalian Perubahan Iklim (“SRN PPI”), and abroad through the registration mechanism of SRN PPI and authorization for foreign carbon trading.

​

Types of Carbon Trading

​​

Below are the detailed explanations regarding types of carbon trading as set out in PR 98/2021:

​

• Emission trading

​​

is applied to businesses and/or activities that have the upper limit (cap) of GHG emissions set through technical approval by the relevant minister. The implementation of such carbon trading with upper limit GHG emissions will be chosen if, based on evaluation, it is found that there are businesses and/or activities’:

​

1. mitigation actions carried out with emissions above the upper limit of GHG emissions; or 

2. mitigation actions carried out with emissions below the upper limit of GHG emissions. 

3. As such, the administration of carbon trading is executed through the transfer of carbon units by business entities. ​

​

• GHG Emission Offse

​​

The GHG emissions offset is applied to businesses and/or activities that have no upper limit of GHG emissions and provides a statement of emission reduction by utilizing the mitigation outcomes from other businesses and/or activities. GHG emission offset is implemented in cases where a business and/or activity: ​

​

1. does not have a specified upper emission limit;

2. achieves reduction in GHG emissions from climate change mitigation actions that are below the established targets and baselines; or 

3. achieves reduction in GHG emissions and climate change mitigation actions that are above the established targets and below the specified baselines.​

​​

Purchase of GHG emissions within the GHG emission offset can only take place after the business entity fulfills its obligations in reducing GHG emissions through climate change mitigation actions.  

​

Further, the administration of CEV in energy, waste, industrial processes and product use, forestry, agriculture, and others sectors in accordance with the advancements of science and technology is specifically regulated through MoEF Reg No. 21/2022.  As mandated by Article 4 (2) MoEF Reg. No. 21/2022, the implementation of carbon trading must adhere to the following provisions: (i) in line with the carbon trading roadmap; (ii) establish emission reduction reserves (buffers); and (iii) take the form of sectoral emission performance – GHG reduction credits or Sertifikat Pengurangan Emisi Gas Rumah Kaca (“SPE-GRK”) for cross-sector carbon trading. SPE-GRK itself is a letter of proof of emission reduction by businesses and/or activities that have gone through measurement, reporting, and verification, as well as recorded in the National Registry System for Climate Change Control in the form of numbers and/or registry codes.

​

In addition, Carbon Trading Permit Allocation or Persetujuan Teknis Batas Atas Emisi Pelaku Usaha (“PTBAE-PU”) is the determination of upper GHG emissions limits for business actors and/or the determination of emission quotas within a certain compliance period for each business actor.  PTBAE-PU is stipulated based on: 

 

• the proposal of business actors, accompanied by required information and business plans encompassing: (i) the actual emissions from operations and activities corresponding to the sector and subsector characteristics within a specified period; and (ii) low-emission activity plans and/or Climate Change Mitigation Action plans ; or 

• direct stipulation by the relevant minister, based on: (i) actual emissions for a single period; and (ii) the accumulation of GHG ceilings allocated to business entities shall not exceed the PTBAE-PU for the corresponding subsector or sub-subsector.  

​

The issuance of the PTBAE-PU is specifically applicable to carbon trading conducted through emissions trading. Meanwhile, the issuance of the SPE-GRK applies to trading through GHG emission offset or the retention of PTBAE-PU resulting from climate change mitigation actions. 

​

Below is an illustration of the timeline for the implementation of GHG emission offset:

​