Sustainable Finance in Indonesia: Obligation to Submit Sustainability Report for Indonesian Corporations

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A. An Introduction

As one of the developing countries in the world, social inequality is one of the long-standing issues in Indonesia. Apart from that, Indonesia is also one of the countries that are geographically exposed to the risk of climate change. The utilization of excessive resources, the increase of social inequality, and environmental damages are probably some of the most unavoidable impacts when it comes to doing certain business activities. One of the solutions to those unavoidable impacts is to create a better financial system by implementing a Sustainable Finance program.

The green economic instrument has been one of the things regulated under Law No. 32 of 2009 on Conservation and Management of the Environment, as lastly amended by Law No. 11 of 2020 on Job Creation (Law 32/2009). Based on Law 32/2009, one of the incentives that can be implemented on the green economic instrument is the development of financial institution system and environmentally friendly investment through capital markets. In connection to the green economic instrument, the Sustainable Finance program is also one of the forms of implementation of Law 32/2009.

Moreover, to follow up on the issuance of Roadmap for Sustainable Finance in Indonesia in 2014, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan, hereinafter will be referred to as OJK) has issued Rule No. 51/POJK.03/2017 on Implementation of Financial Sustainability for Financial Services Providers, Issuers and Public Companies (OJK Rule 51/2017). OJK Rule 51/2017 applies to:

1. The Financial Services Institutions, include entities carrying out activities in the banking sector, capital market, insurance, pension funds, financing company, and Other Financial Services Institutions (hereinafter will be referred to as Financial Services Institutions)
2. Issuers (parties that conduct public offerings)
3. Public Companies (companies whose shares have been owned by at least 300 hundred shareholders and have paid-up capital of at least IDR 3 billion)

According to OJK Rule 51/2017, Financial Services Institutions, Issuers, and Public Companies are required to submit a Sustainable Financial Action Plan and Sustainability Report to OJK.

B. Sustainable Finance

Under OJK Rule 51/2017, Sustainable Finance is defined as comprehensive support from the financial services sectors to create sustainable economic growth by aligning economic, social, and environmental interests. Financial Services Institutions, Issuers, and Public Companies are required to implement Sustainable Finance in their business activities.

One of the principles that must be applied in implementing the Sustainable Finance program is the principle of responsible investment. OJK 51/2017 defines the principle of responsible investment as a financial investment approach to sustainable development projects and initiatives, nature conservation products, and policies that support sustainable economic development.

The other principles of Sustainable Finance are a sustainable business strategy and practices, social and environmental risk management, good governance, informative communication, inclusion, development of the leading priority sectors, and coordination and collaboration.

C. Sustainable Finance Action Plan

To implement the Sustainable Finance program, the Financial Services Institutions must prepare a Sustainable Finance Action Plan (Rencana Aksi Keuangan Berkelanjutan). OJK Rule 51/2017 defines the Sustainable Finance Action Plan as a written document that describes the business activity plan and work program of the Financial Services Institutions for the short term (1 year) and long term (5 years) in accordance with the principles used to implement Sustainable Finance (as mentioned above).

The Sustainable Finance Action Plan must be submitted annually to OJK. The Financial Services Institutions which are also Issuer and/or Public Companies must submit the Sustainable Finance Action Plan to OJK.

D. Sustainability Report

Financial Services Institutions, Issuers, and Public Companies are required to prepare a Sustainability Report. OJK Rule 51/2017 defines Sustainability Report as a report that is announced to the public that contains the economic, financial, social, and environmental performance of a Financial Services Institution, Issuer, and Public Company in running their sustainable business.

The key provisions regarding the submission of the Sustainability Report under the OJK Rule 51/2017 are as follows:

1. The Sustainability Report must be prepared separately from the annual report or as a part of the annual report.
2. The Sustainability Report must be submitted to OJK every year.
3. If the Financial Services Institutions, Issuers, and Public Companies submit a Sustainability Report separately from the annual report, then the Sustainability Report must be submitted to OJK every year no later than 30 April of the following year.
4. Issuers and Public Companies have a different submission deadline to submit their Sustainability Report: (i) 30 April 2021 at the latest, for the Issuers with large-scale assets and Public Companies; (ii) 30 April 2023 at the latest, for the Issuers with medium-scale assets; and (iii) 30 April 2025 at the latest, for the Issuers with small-scale assets. Some Financial Services Institutions may be subject to a different timeline.
5. If the Financial Services Institution is also an Issuer or Public Company, then the obligation to submit a Sustainability Report must be submitted according to the earlier Sustainability Report period.

E. Corporate Social Responsibility

Corporate Social Responsibility (CSR) under OJK Rule 51/2017 has the same definition as CSR under Law No. 40 of 2007 on Limited Liability Companies (Company Law). However, OJK Rule 51/2017 seems to distinguish the concept of CSR from the concept of sustainability as regulated under the OJK Rule 51/2017. The Issuers that are not Financial Services Institutions and Public Companies that are not Financial Services Institutions, but are required to implement CSR, may allocate a certain amount of CSR funds to support the implementation of the Sustainable Finance program. The allocation of a certain amount of CSR funds must be disclosed in the Sustainable Finance Action Plan, and then it must be reflected in the Sustainability Report.

Furthermore, OJK Rule 51/2017 clearly stipulates the examples of allocation of CSR funds to implement the Sustainable Finance:

1. distribution of financing to the feasible micro-businesses that do not have access to funding from Financial Services Institutions to support their sustainable business development
2. provide training for prospective customers on sustainable business
3. implementation of a campaign for sustainable production and consumption
4. provide Insurance premium subsidies for farmers, fishermen, and low-income people who are vulnerable to disasters

F. Incentives

Under OJK Rule 51/2017, OJK has provided some incentives for the Financial Services Institutions, Issuers, and Public Companies that are implementing a Sustainable Finance program effectively. The incentives are in the form of:

1. Engaging the Financial Services Institutions, Issuers, and Public Companies in the human resources development programs
2. Awarding the Sustainable Finance Award
3. Other forms of incentives

G. Moving Forward

There are several points to be highlighted in OJK Rule 51/2017:

1. Until now, OJK has not yet specifically regulates the standards or benchmarks on what kind of actions or efforts are done by the corporations that can be classified as ‘sustainable’ actions.
2. OJK has specified the examples of activities that can be conducted after the allocation of CSR funds in order to implement the Sustainable Finance as stated in Point E above. Therefore, it could be argued that if a company is allocating its CSR funds to conduct the activities as stated in Point E above, then those activities are conducted by a company to support the Sustainable Finance program. After that, those activities can be disclosed in the company’s Sustainable Finance Action Plan and/or Sustainability Report.
3. In connection with the provision regarding the incentives under OJK Rule 51/2017, OJK has not yet clearly stipulates the standards regarding the implementation of Sustainable Finance that can be deemed as “effective” according to the OJK’s standards. It is also still unclear what are the forms of “other incentives” as stated in OJK Rule 51/2017. If a company is entitled to get an incentive but not in the form of human resources development programs or Sustainable Finance Award, then it will require more clarification from OJK on what is the form of “other incentive” that can be received by a company.
4. Financial Services Institution, Issuer, and Public Company that violates certain provisions under OJK Rule 51/2017 may be subject to administrative sanctions in the form of verbal or written warnings. It is still unclear whether OJK will impose sanctions for the companies that do not meet their sustainable targets. By looking forward to the first reporting of the companies that will be due next year, then we will be able to see the enforcement of OJK Rule 51/2017.

Apart from the several unclear provisions in OJK Rule 51/2017, the issuance of OJK Rule 51/2017 indicates that the Sustainable Finance program is a form of assistance from OJK to the Republic of Indonesia in fulfilling its commitment to support sustainable development. With the enactment of OJK Rule 51/2017, Indonesian corporations can (and should) take this opportunity to diversify its funding sources, particularly green financing through capital markets instruments. This is in line with the principle of responsible investment, which believes that the creation of long-term investment returns depends on economic, social, environmental, and governance systems. Implementing a Sustainable Finance program by adding more green investment in the portfolio is one of the concrete chances to do well by doing good.