Environmental, Social and Governance Regulations: Indonesia

Environmental, social and governance (ESG) disclosure requirements in Indonesia are primarily applicable to publicly listed companies and financial institutions, subject to the supervision of the Indonesian Financial Services Authority (Otoritas Jasa Keuangan, or OJK).

Only non-publicly listed companies in the natural resources sector are required to prepare a corporate social and environmental plan. All other private companies are only obliged to include information on their implementation of corporate social and environmental responsibility programmes in their annual reports.

LISTED COMPANIES AND FINANCIAL SERVICES INSTITUTIONS

For publicly listed companies and financial institutions, the relevant ESG disclosure obligations arise from OJK Regulation No. 51/ 2017 and OJK Circular Letter No. 16/2021.

OJK Regulation No. 51/ 2017 Regarding the Implementation of Sustainable Finance for Financial Service Institutions, Issuers (Emiten) and Public Companies generally imposes the obligation for financial institutions and public companies to implement sustainable finance.

This entails mandatory annual submission of a sustainability report, either as part of the company’s annual report or as a standalone report to the OJK.

OJK Circular Letter No. 16/2021 Regarding the Form and Substance of the Annual Report of Issuers (Emiten) and Public Companies governs the form and content of ESG disclosures in annual reports of publicly listed companies with directives.

The annual report shall include, in the company profile section, a list of industry associations (national or international) related to sustainable finance implementation. The annual report shall also disclose actions taken by the company as part of its social and environmental responsibility.

This disclosure is the sustainability report regulated by OJK Regulation No. 51/2017, which 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.

Failure to comply with these sustainability report requirements shall subject the publicly listed company or financial institution to administrative sanctions in the form of a reprimand or written warning from the OJK.

The requirements under the above-mentioned OJK regulation and circular letter are not based on international standards. But, in practice, some publicly listed companies have gone above and beyond the requirements under Indonesian law, with reference to international standards such as the Task Force on Climate-related Financial Disclosures (TCFD) in their ESG reports, even though this is not mandatory.

OJK Circular Letter No. 16/2021 merely mentions that, aside from minimum disclosure required under the circular letter, companies can also refer to international standards as necessary and desirable. However, there are no specific plans to implement any particular international standards so far.

NON-LISTED COMPANIES

Non-publicly listed companies utilising natural resources must prepare a corporate social and environmental responsibility plan under Government Regulation No. 47 of 2012 Regarding Corporate Social and Environmental Liability.

Other non-publicly listed companies are regulated by Law No. 40 of 2007 Regarding Limited Liability Companies, amended by Law No. 6 of 2023 (the Company Law). This directs a general obligation to prepare an environmental and social responsibility implementation report as part of annual reporting.

The mandates under the Company Law and Government Regulation No. 47/2012 are very general and do not elaborate on the standard or format of the implementation report, or what information it must contain.

While Indonesia has taken steps to promote sustainable development and responsible business practices, the regulatory framework for ESG compliance is still evolving. This absence of specific guidelines and standards can make it challenging for businesses to determine expectations and requirements for ESG reporting and performance.

Aside from the evolving regulatory regime, other challenges for businesses include: data availability and quality; expertise and capacity of human resources (especially when there are no clear ESG practice standards); and access to finance, where green projects may not have sufficient bankability precedent, making it more difficult to obtain assistance from conventional financing institutions and harder overall to get green projects up and running.

Finally, the lack of clear mandatory regulations for ESG disclosure is another challenge facing non-publicly listed companies for ESG compliance.

CLIMATE TARGETS

Neither public nor non-publicly listed companies are obliged to independently set and meet climate-related targets such as emission reductions or energy transition. Nonetheless, they must all disclose any sustainability-oriented strategies in sustainability reports.

But aside from independently set targets, companies in particular industries will be subject to a government-determined emissions ceiling. This relates to cap-and-trade and/or cap-and-tax mechanisms for carbon trading schemes that Indonesia plans to put in place. For example, the Ministry of Energy and Mineral Resources plans to issue an emissions ceiling technical approval for coal-fired power plants. Companies subject to this emissions ceiling must ensure their greenhouse gas emissions comply with the determined ceiling.

Companies that do not comply will face a carbon tax (which is yet to be implemented), or will need to purchase emission reduction credits from other companies to offset their excess emissions.

Other than the emissions ceiling there is no mandatory requirement for companies to set, meet and/or disclose climate-related targets.

DECARBONISATION

Indonesia targets reducing carbon emissions unconditionally by 31.89%, or conditionally by 43.2%, compared to “business as usual” CO2 emissions.

This target is included in the country’s enhanced Nationally Determined Contributions (NDC), the transition towards a second NDC aligned with the Long-Term Low Carbon and Climate Resilience Strategy 2050, a vision to achieve net-zero emissions by 2060 or sooner.

To achieve the greenhouse gas emissions target, the government is working on regulations and infrastructure to establish carbon trading markets, where both compliance and voluntary carbon markets are contemplated. The compliance carbon market would initially be limited to coal-fired power plants and later expand to other types of power plants from 2025.

The expected carbon exchange shall be licensed by the OJK, which is mandated to prepare the necessary regulations to implement carbon trading. In short, as currently contemplated, the carbon exchange will be a system that:

• Regulates carbon trading;
• Records ownership of carbon units;
• Develops carbon trading infrastructure;
• Regulates state revenue deriving from carbon trading; and
• Administers and oversees carbon trading transactions.

As the OJK develops logistics and legal infrastructure to implement the carbon exchange, the imposition of a carbon tax for coal-fired power plants – originally set to take effect by 1 April 2022 – is now planned to be introduced in 2025. Other emission sectors will also be subject to a carbon tax but the government has yet to determine the exact industries it will impact.

The mutual recognition agreement or mechanism between the Indonesian Ministry of Environment and Forestry and non-domestic carbon credit certification bodies is still being finalised, pending which, international carbon trading with carbon credits issued by non-national certification bodies is, for all intents and purposes, barred.

GREENWASHING

here is no law in Indonesia that specifically addresses greenwashing, which is not yet recognised as a legal concept. At best, there are grounds under civil or criminal liability that can be used to either claim against or instigate investigations of parties whose actions may amount to greenwashing.

These likely grounds include: breaches of directors’ fiduciary duties; tort claims for misrepresentation; and criminal provisions on fraud, whether capital market-related fraud under the Capital Markets Law, or general fraud provisions under the Criminal Code.

Until now there have been no recent examples of legal proceedings or actions on greenwashing, and no major greenwashing claims. Regardless, the risk of claims against companies – in particular, listed companies and financial institutions – is expected to increase amid greater public scrutiny as reporting requirements become more robust and a sense of urgency on sustainability continues to grow.

Originally published in the Asia Business Law Journal 

By SSEK, Indonesia, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact indonesia@transatlanticlaw.com

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