ESG and the future of business: Why is it important?

Nowadays, business is no longer solely about financial figures such as revenue growth and profit and loss. Instead, in this increasingly complex modern era, the perspective has shifted, where sustainability and social responsibility have become crucial elements in assessing the success of a business. In other words, businesses today must be more than just profit-generating entities; their social and environmental roles also define their corporate image. This leads us to the increasingly important concept of Environmental, Social, and Governance (“ESG”).

What is ESG?

In short, ESG is an approach that considers non-financial aspects in a company’s operations. This concept comprises three main pillars: “Environmental” which focuses on the practices of maintaining ecological balance and supporting climate change initiatives; “Social” which includes a company’s relationships with the community and employee well-being, including training, workplace safety, and corporate social responsibility (“CSR”); and “Governance” which encompasses internal management, control, and investor rights in conducting business.

The Importance of ESG in Business

ESG has become a foundational element for businesses to achieve long-term sustainability and growth. This is why business stakeholders must understand the urgency of implementing ESG in their operations. Here are some reasons why ESG is crucial to implement in a business:

1. Contribution to Social and Environmental Progress: Companies can play a positive role in supporting environmental preservation, improving community welfare, and promoting social responsibility initiatives.
2. Building Trust and Reputation: Modern consumers are increasingly discerning when choosing products and services from companies that prioritize social and environmental responsibility. By implementing ESG, companies can ensure their transparency and accountability of their operations to their consumers or clients.
3. Talent Acquisition: Young professionals and emerging talent are placing more emphasis on joining companies that are socially and environmentally conscious. This transformation in priorities means that businesses that actively adopt ESG principles will be more adept at attracting and retaining high-skilled employees. ESG ensures not just the sustainability of business operations but also the sustainability of the workforce itself.
4. Access to Sustainable Funding Sources: Many investors and financial institutions prefer to support companies that implement ESG. Therefore, companies that integrate ESG into their operations benefit from enhanced access to the necessary financial support for growth and innovation.
5. Risk Mitigation: ESG helps companies manage non-financial-related risks, such as climate change, strict environmental regulations, or potential negative impacts on their reputation. By integrating ESG into their operations, companies can better prepare for changes and reduce potential losses.

ESG Guidelines

ESG adoption isn’t universally mandatory; it largely remains voluntary. ESG implementation standards are made under several internationally acclaimed voluntary guidelines and frameworks, which can be adhered to by businesses according to their respective sectors, strategic goals, and stakeholder expectations.

There are ESG guidelines to adhere , such as the Corporate Sustainability Reporting Directive (CSRD), which emphasizes sustainability reporting law, and expands reporting on ESG issues, affecting more entities, including some non-EU companies and subsidiaries; the Task Force on Climate-related Financial Disclosures (TCFD), which guides businesses and sectors in disclosing climate-related financial information to assist investment, credit, and insurance decisions; and the Global Reporting Initiative (GRI), a widely adopted, standardized ESG reporting framework with a materiality-driven approach.

These guidelines are essential in helping businesses navigate the complex world of sustainability. They offer a structured path to ESG reporting, ensuring that companies are accountable for their non-financial impacts. Even though these guidelines are not universally binding, they empower businesses to adapt ESG practices to their operations and industries, with applicability contingent on sectoral activities. Understanding and adhering to these guidelines is critical to fostering responsible and sustainable business practices, as well as aligning with the ever-evolving expectations of stakeholders and regulators.

ESG in Indonesia

Much like the global landscape, ESG is typically implemented on a voluntary basis in Indonesia, except for certain sectors that are subject to regulatory mandates. ESG regulations in Indonesia are still fragmented across various laws and regulations, such as 1) environmental aspects, which are governed by Law No. 32 of 2009 concerning Environmental Protection and Management, which has been partially amended by Law No. 6 of 2023; 2) social aspects, which are governed by Law No. 40 of 2007 regulating the obligation of companies to develop CSR activities; and 3) in the financial sector, instruments like Greenbonds, which are issued to finance or refinance a part or the entire business activities that are environmentally conscious, and ESG Microsites showcase, which is used to assess and track ESG compliance of companies.

Here is how ESG has been implemented in Indonesia so far:

1. Mandatory ESG Reporting

One of the significant milestones in Indonesia’s ESG journey is the mandatory ESG reporting through Financial Services Authority Regulation Number 51 of 2017 concerning Sustainable Finance Implementation for Financial Service Institutions, Emitters, and Public Companies. This regulation requires publicly-listed companies, financial service institutions, and emitters to submit annual sustainability reports distinct from their financial reports, which must be submitted to the Financial Services Authority or Otoritas Jasa Keuangan (OJK). The consequences of non-compliance can result in administrative sanctions.

Amid these regulations, many organizations find themselves in need of expert guidance to navigate the complexities of ESG reporting. Professionals well-versed in this field can be invaluable allies to ensure a smooth and compliant reporting process, and to help companies avoid potential pitfalls.

2. The ESG Framework and Manual for Infrastructure Project Financing

In 2022, the Indonesian Ministry of Finance introduced the ESG Framework and Manual. Although this is not yet in the form of regulations, this policy has been implemented by ministries, government agencies, and local governments with various roles e.g., as project owners, investors, private-sector lenders, and even state-owned enterprises or Badan Usaha Milik Negara (BUMN) under the Ministry of Finance (Special Mission Vehicle) in the execution of government support assignments. Furthermore, the ESG Framework and Manual plays a crucial role in the Ministry of Finance’s internal policies and serves as a guiding light for policymakers.

The journey of the ESG Framework and Manual unfolds methodically. This begins with the formulation of the ESG framework and the ESG Manual. These foundational documents are then put to the test through pilot projects under the Public-Private Partnerships (“PPP”), particularly those receiving Project Development Facility (“PDF”) support. These trials will be further carried out in the Public Works and People’s Housing sector, which includes projects in housing and water resources.

Subsequently, the implementation phase will commence with an initial focus on PPP projects benefiting from the PDF across various sectors by aligning with their application and approval for PDF support. This roll-out will then expand to encompass a broader array of projects under the PPP framework and those seeking government support. Ultimately, the framework and manual are expected to reach their concluding stage, where they will be further applied to non-PPP projects in 2025.

The ESG Framework and Manual lays down a clear roadmap for infrastructure projects as it defines roles and responsibilities across various ESG standards. These standards span an array of vital aspects:

Environmental	Social	Governance
Pollution Prevention and Waste Management	Employment and Work Environment	Leadership and Governance
Biodiversity Conservation	Diversity, Equality, Inclusion, and Access	Risk and Control
Natural Resource Management and Energy Efficiency	Social Interest
Climate Change Mitigation and Adaptation, and Disaster Risk	Cultural Heritage

 

This systematic approach reflects Indonesia’s commitment to elevating ESG standards in infrastructure projects, nurturing sustainability, and strengthening various economic development aspects. The future holds the promise of a more sustainable and inclusive landscape for the benefit of all stakeholders involved. Having a trusted partner with a deep understanding of project infrastructure, financing, and relevant legal matters can be instrumental in ensuring a smooth and compliant process. When it comes to navigating the ESG landscape, a capable legal ally can make a significant difference in achieving your goals with confidence.

Challenges of ESG Implementation in Indonesia

The implementation of ESG in Indonesia, like in many other countries, faces several challenges that need to be addressed for its successful adoption. Some key challenges cited from various sources include:

1. Lack of Awareness and Understanding: Not all stakeholders fully grasp the concept of ESG. Education and awareness of ESG need to be enhanced, especially among business owners and practitioners.
2. Lack of Data and Transparency: A major hindrance to implementing ESG in Indonesia is the inadequate availability of data. Many companies do not have effective ESG reporting systems, and that hinders the ESG performance monitoring and comparison.
3. Additional Funding: ESG implementation often requires additional investments in systems, training, and development. These costs can be a barrier, especially for small and medium-sized enterprises.
4. Limited Regulations: While there are some ESG-related regulations, comprehensive ESG regulations and strong enforcement are still needed to ensure corporate compliance with ESG principles.
5. Human Resources: Developing, implementing, and reporting ESG initiatives requires specialized skills. Many companies do not have trained personnel in this area.

In conclusion, ESG has emerged as a pivotal force shaping the future of business in Indonesia. Its importance is underscored by its potential to drive social and environmental progress, enhance trust and reputation, foster sustainable business strategies, access sustainable funding, and mitigate risks. While challenges remain, the growing adoption of ESG practices signals a positive step towards fostering responsible and sustainable businesses in Indonesia.

Author: Christopher Johnston, Business Advisor.

At ADCO Law, we are ready to assist you in understanding and implementing your ESG-integrated business. Feel free to contact us for the guidance and support you need for a sustainable and responsible business. 

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About ADCO Law:

As Alliott Global Alliance’s law firm representative in Indonesia, ADCO Law offers clients a wide range of integrated legal services, including commercial transactions and corporate disputes in a variety of industry sectors.

Over the course of more than a decade, we have grown to understand the industries of our clients as well as regulatory aspects, and we provide comprehensive and solid legal advice and solutions to minimize legal and business risks.

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