It is important that any business in Indonesia knows about the implementation of Environmental, Social, and Governance ("ESG") principles under the Indonesian law in commencing their operation. Having said that, investors shall evaluate and analyze the ESG aspects in their investment decision making process, to make sure the sustainability and ethical impact of the company's operation and business are in line with their values and long-term goals.
While there are certain sectors that incorporate ESG aspects into their day-to-day operations, the prevailing laws and regulations do not provide a comprehensive framework that uniformly applies to all business actors in Indonesia. This regulatory gap creates uncertainty for companies seeking to align their business practices with the global ESG standards.
The Financial Services Authority (Otoritas Jasa Keuangan or "OJK") as the governing body who is responsible for investment regulations in Indonesia, introduced ESG practice in Indonesia in December 2014 through Roadmap for Sustainable Finance in Indonesia 2015 -2019, which is further continued based on Roadmap to Sustainable Finance Phase II (2021 - 2025). In this regard, OJK has issued several regulations as the legal basis for ESG that regulate sustainability reporting requirements for publicly listed companies.
Meanwhile, current industries that have not yet incorporated ESG principles continue to adhere to the traditional Corporate Social Responsibility ("CSR") framework, which need to be improved into ESG framework.
In light of the above, this article will provide a general overview of the ESG and its implementation under Indonesia's prevailing laws and regulations.
Current ESG and CSR Development in Indonesia
One of the main laws in Indonesia that closely relates to ESG is Law No. 40 of 2007 on Limited Liability Company as amended by Law No. 6 of 2023 on Enactment of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law ("Company Law"), and Government Regulation No. 47 of 2012 on Corporate Social and Environmental Responsibility ("GR 47/2012"). But as mentioned above, these regulations do not focus on the implementation of ESG principles, but are instead limited to outline the CSR obligations of companies in Indonesia.
According to Article 1 (3) of the Company Law, CSR is defined as a company's commitment to actively participate in fostering sustainable economic development for both the company itself and its surrounding environment, including the local community. The obligation to implement a CSR is only mandatory to companies that engage in the field of and/or related to natural resources businesses, (Article 2 and 3 of GR 47/2012). Meanwhile, other private (non-public) companies are only required to include information on their implementation of CSR programs in their annual reports (Article 66 (2) of the Company Law).
Implementation of CSR: Under GR 47/2012, this CSR activities and implementation framework are determined by the Board of Directors as part of the company's annual plan. This CSR plan must outline the scheduled activities and the necessary budget, which must be approved by the Board of Commissioners or the General Meeting of Shareholders ("GMS") (Article 4 of GR 47/2012).
Upon completion, the implementation of CSR program must be reported to the company's Annual General Meeting of Shareholders ("AGMS") (Article 66 (2) of the Company Law and Article 6 of GR 47/2012).
In practice, many other Indonesian companies, apart from those that engage in natural resources businesses, also apply CSR initiatives in voluntary basis, which means, they have the flexibility to implement and allocate their funds or resources for various CSR initiatives. For example, they may provide training and development programs to the surrounding communities, establish health or sports facilities within their offices, or offer educational subsidies for their employees' children. Moreover, companies can also carry out CSR programs focusing on environmental conservation and social welfare enhancement. This approach is also commonly adopted by businesses that heavily rely on natural resources in their operations.
As for the publicly listed companies in Indonesia, it is mandatory for these publicly listed companies to implement their CSR obligation, particularly by disclosing their CSR-related information in their annual report under OJK Regulation No. 29/POJK.04/2016 on Annual Report of the Issuers and Public Companies ("OJK Reg. 29/2016"). According to Article 4 of OJK Reg. 29/2016, the implementation of CSR must be included in a public company's annual report, which must be submitted to OJK no later than the fourth month of the following year.
According to Article 179 of Governmental Regulation ("GR") No. 96 of 2021 on Implementation of Mineral and Coal Mining Business Activities as amended by GR 25 of 2024 ("GR 96/2021"), mining companies must implement community development initiatives within their operational areas. Furthermore, the development plan must be consulted with the relevant authorities (i.e., the Ministry of Energy and Mineral Resources) and include a designated budget allocation.
ESG Obligation for Public Companies and Financial Services Institutions
In Indonesia, ESG implementation is mandatory to public companies and financial institutions, as regulated under OJK regulation No. 51/POJK.03/2017 on Implementation of Sustainable Finance for Financial Services Institutions, Issuers and Public Companies ("OJK Reg. 51/2017"), and OJK Circular Letter No. 16/2021. Under OJK Reg. 51/2017, Financial Services Institutions and Public Companies are required to implement Sustainable Finance, which is defined as a comprehensive support from the financial services sector to a sustainable economic growth by aligning the economic, social, and environmental interests.
To implement Sustainable Finance, these entities are also obligated to submit Sustainable Finance Action Plans and Sustainability Reports, which detail their economic, financial, social, and environmental performance in doing their sustainable businesses. A company must submit the plan and report to OJK annually. In addition, the report must also be published on the company's website, as stipulated in Articles 10 and 12 of OJK Reg. 51/2017.
As a guidance, OJK issued Circular Letter No. 16/2021 Regarding the Form and Substance of the Annual Report of Issuers (Emitent) and Public Companies, which governs the form and content of ESG disclosures in annual reports that must, at least, include the following information:
- Sustainable strategies;
- Summary of sustainability (economic, social, and environmental) efforts;
- Brief company profile;
- Explanation of the Board of Directors;
- Sustainable governance;
- Sustainable performance;
- Written verification from independent parties, if any;
- Readers' feedback, if any; and
- Company response to feedback in the previous year's report.
Please note that the submission of this Sustainable Report could be made as an integral part of their annual report, or a separate report. Non-compliance with this requirement can result in administrative sanctions, including written warnings issued by OJK (Article 13 of OJK Reg. 51/2017).
It is also noted that under OJK Reg. 51/2017, Financial Services Institutions, Issuers, and Public Companies conducting effective ESG effectively, can be granted incentives by OJK in the form of awarding of Sustainable Finance Award and other incentives.
Concluding Remark
While Indonesia does not have a specific regulation that mandates all business actors to implement ESG principles, several sectors have shown a progressive shift toward incorporating these principles into their day-to-day business operations. This trend reflects Indonesia's growing commitment of integrating ESG considerations including environmental sustainability, social responsibility, and good corporate governance, into the regulatory and business landscape.
In recent years, various regulatory bodies have taken forward steps to encourage ESG adoption through various regulatory frameworks. For instance, the financial sector has witnessed such implementation, with banks and financial services institutions being encouraged to adopt Sustainable Finance and obligated to provide comprehensive sustainable reports that must be submitted to OJK as part of their annual reports. Moreover, OJK also requires the publicly listed companies to disclose the ESG-related information into their annual reports, or provide the sustainable reports.
While these developments have not yet made the implementation of ESG principles mandatory to all business actors, they indicate a shift toward regulations that may eventually require businesses in various industries to implement and report their ESG commitments for the purpose of responsible investment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
