The Covid-19 pandemic and the current state of economic downfall that is taking place in all parts of the world has triggered an extraordinary crisis and at the same time has become a momentum for all parties to re-evaluate the importance of implementing sustainable development goals, predominantly environmental, social, and governance aspects in all aspects of living, including in investment activities being one of the driving factors of national economy. Responsible investment is an integral part of sustainable development goals, which serves as a roadmap for businesses and investors to align their goals “to serve the long-term goals of the society”. Transitioning to sustainable investment stems from a change in the mindset of business actors that business activities are best conducted when environmental, social and governance (“ESG”) aspects are taken into consideration.
Based on GSI data, ESG investment has experienced a rapid increase in recent years. ESG investment as of 2018 has reached USD$30 trillion, up 68% since 2014 and tenfold since 2004. This acceleration is driven by increasing awareness on ESG aspects to corporate impacts, as well as increasing demand from investors having the mindset that ESG mindset can guarantee the company’s long-term success. In a commercial perspective, sustainable development goals create many opportunities for both investors and corporations. The value of sustainable development rests in their ability to offer an effective way to look at opportunities and risks, to translate the impact of investment activities into real economy outcomes and provide a useful means of engaging with stakeholders.
The SDGs also provide a framework and common language for companies to integrate sustainability information, mainly implementation of ESG standards into their reporting cycles, providing more information to both investors and shareholders. A survey conducted by KPMG in 2020 showed that 80% of the Top 100 companies in 52 countries have adopted sustainable reporting standards. Meanwhile, a survey conducted by GlobeScan and GRI on 27,000 respondents in 27 countries shows that 51% of respondents believe that sustainability reports will increase public trust. Although there are no standardized ESG reporting systems internationally, many external organizations have proposed different reporting models which corporations can easily incorporate into their existing corporate social responsibility reporting systems. Some notable ESG reporting initiative include (i) the United Nations Principles for Responsible Investment (UNPRI) Reporting Standards, (ii) the Global Reporting Initiative (GRI) Reporting Standards for investors, and (iii) the European Union Non-Financial Reporting Directive, which is by far the most comprehensive ESG reporting standard at national level.
Various empirical studies on the application of sustainable financial statements to firm value generally give positive results. Loh, Thomas and Wang report the positive impact of publishing a sustainability report on corporate value in Singapore. Kuzey and Uyar show a positive response from various stakeholders on reporting environmental aspects for manufacturing companies in Turkey. Li, Liao and Abitar show a positive correlation of sustainability reports on investor responses to publicly listed companies in China. One of the reasons for this is the regulations issued by the governments of each of these countries which have begun to impose an obligation for business actors to conduct sustainability reporting.
Incorporating SDGs in a corporation’s reporting establishes a direct line of communication to investors, local governments, clients, and employees to demonstrate the corporation’s commitment to the advancement of the SDGs and to adapting for the new global sustainability agenda. Disclosing this information is particularly important for institutional investors, like pension and sovereign wealth funds and foundations, who are increasingly interested in aligning their investment portfolios with their sustainability and ethical goals. In addition, third party ESG performance analysts rely on the quality and quantity of ESG corporate disclosure; thus, having a standardized ESG reporting guide could easily have a positive impact on a corporation’s third-party ESG ratings, and could also help lead to inclusion in low carbon and other ESG index funds based on these ratings.
In line with global initiatives on sustainable development and ESG investing, OJK released the Sustainable Finance Roadmap Phase I (2015 – 2019) which aimed to increase the understanding and capacity of the financial services sector to shift from traditional investment to an ESG-minded investing. The Roadmap Phase I focused on enhancing awareness, capacity building as well as laying out the regulatory foundation for financial institutions and has achieved several milestones such as introduction of sustainable finance principles, identification of numerous sustainable business criteria, developing an incentive scheme, and conducting series of training programs for the financial industry.
However, some gaps remain to be filled, such as the industry’s low awareness of sustainable finance, the absence of commonly agreed green standards in a national scale and untapped business opportunities in the sustainable sector. Some of these gaps must be resolved immediately so that the financial industry can maximize the opportunities as the demand of the market and society for sustainable financial products and services increases. These opportunities must be followed by the management of climate-related risks to prevent unwanted negative impacts. Climate change risks include risk of climate change phenomena that cause property damage and directly affect business processes (physical risk), risk arising from changes in policy and technology development while shifting to a low-carbon economy (transition risk), and risk of legal loss or claims due to business activities that disregard the impact of climate change (liability risk). To hasten the transition of the financial sector to sustainability, OJK has created the Sustainable Finance Roadmap Phase II (2021-2025) (the “Roadmap II OJK”) to accelerate the implementation of environmental, social, and governance aspects in Indonesia.
The Roadmap II OJK focuses on creating a comprehensive sustainable finance ecosystem that involves all related parties and promoting cooperation at various levels. In the Roadmap II OJK, OJK aims to strengthen sustainable finance on 7 components, namely policy, product, market infrastructure, coordination among ministries/institutions, non-government support, human resources, and awareness. OJK is also committed to creating transparent regulations, building synergies with other ministries/institutions, and improving the financial industry’s capability to attract more ESG investments into the country.
Despite the positive expectation that OJK has in mind in enacting the Roadmaps of Sustainable Finance, it is worth comparing the Roadmaps and the regulations enacted under the Roadmaps, specifically on sustainable reporting, with ESG and sustainable finance initiatives and standards that are well-established internationally. This comparison is drawn in order to have a realistic picture on the significance of the OJK Roadmaps, and whether there are any points of improvements needed on Roadmap II OJK.
Penulis: Iman Prihandono and Dewi S. Yuniarti
Jurnal: Indonesia Sustainability Reporting Standard: What Needs to be Improved?
