ESG in APAC - Indonesia by SSEK Law Firm

Please click on the podcast above for a snapshot of the three key themes of ESG reporting, transition planning and greenwashing in respect of Indonesia. Scroll down for further information on each key theme.

A. ESG Reporting

1. Are there legal or regulatory requirements for companies to make ESG disclosures in your jurisdiction?

Yes, but only for publicly listed companies and financial institutions that are subject to the supervision and regulatory authority of the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK). No similar obligations currently exist for non-publicly listed companies.

2. What are the key legislative and regulatory sources for ESG disclosure requirements and to whom do they apply?

ESG disclosure requirements are primarily aimed at listed companies and financial institutions, under the regulations below.

OJK Regulation No. 51/POJK.03/2017 TAHUN 2017 regarding the Implementation of Sustainable Finance for Financial Service Institutions, Issuers (Emiten), and Public Companies (dated 27 July 2017) (OJK Reg. 51/2017)

This regulation generally imposes the obligation for financial institutions and public companies to implement sustainable finance and make relevant disclosures to the OJK and the general public. The sustainable finance obligation requires submission of a Sustainability Report, either as part of the annual report or as a stand-alone report, to the OJK annually.

OJK Circular Letter No. 16/SEOJK.04/2021 regarding the Form and Substance of the Annual Report of Issuers (Emiten) and Public Companies (dated 29 June 2021) (OJK CL 16/2021)

This regulation governs the forms and content of ESG disclosures in the annual reports of publicly listed companies. For example:

(a) The annual report shall include in the company profile section a list of industry associations (national or international) related to the implementation of sustainable finance.

(b) The annual report shall disclose, among other things, the actions taken by the company as part of its social and environmental responsibility. This disclosure shall be the Sustainability Report as per OJK Reg. 51/2017. The relevant explanations must at least include:

(i) Sustainable strategy;

(ii) Summary of the company’s sustainability efforts (economic, social, and environmental);

(iii) Brief profile of the publicly listed company;

(iv) Board of Directors’ remarks;

(v) Sustainable governance;

(vi) Sustainable performance;

(vii) Written verification from independent party(ies), if any;

(viii) Feedback from readers, if any; and

(ix) Response to the feedback from the previous year’s report.

In addition to the above requirements, companies that utilize natural resources are required to prepare a corporate social and environmental plan. This requirement is governed by Government Regulation No. 47 of 2012 regarding Corporate Social and Environmental Liability (GR 47/2012). GR 47/2012 is very general and only governs the requirement to submit a corporate social and environmental plan without elaborating on the standard and format of the plan or what information the plan must at a minimum contain.

3. Are the requirements mandatory or do they apply on a comply-or-explain basis?

The disclosure requirement is mandatory for publicly listed companies and financial institutions. Failure to comply with this requirement is subject to administrative sanctions in the form of a reprimand or written warning from the OJK.

4. Which aspects of ESG do the requirements focus upon?

For listed companies and financial institutions, the requirements cover economic, environmental, social and governance aspects.

5. Are the disclosure requirements based on international standards? If so, which one(s)?

No, the requirements under OJK Reg. 51/2017 and OJK CL 16/2021 are not based on international standards.

6. Are there any mandatory requirements for the disclosure of Scope 3 GHG emissions?

The disclosure of Scope 3 GHG emissions is encouraged but not mandatory. The OJK regulations do not distinguish between different types and scope of GHG emissions. Publicly listed companies nonetheless are required to disclose, as a minimum requirement in their Sustainability Report, their emission reduction efforts.

7. Are there assurance requirements?

Assurance is encouraged but not mandatory. One of the minimum requirements in a Sustainability Report includes written verification from independent parties, with the qualifier “if any”.

8. Are voluntary ESG disclosures customary?  

A few notable listed companies in various sectors (banking, mining, consumer goods) have made reference to international standards (such as the TCFD) in their ESG reports even though doing so is not mandatory.

9. Is there a local taxonomy? Is it mandatory and what is its scope of application?

No.

10. Are there plans to adopt the ISSB sustainability and/or climate-related disclosure standards? If so, to what extent will the standards be mandatory, to whom will they apply and what is the timeline?

OJK CL 16/2021 only mentions that aside from the minimum disclosure required under the circular letter, companies can also refer to international standards as necessary and desirable. We are not aware of any plans to implement any identifiable international standards.

11. Other upcoming developments / direction of travel

None other than the above.

B. Transition planning and net zero

1. Has your jurisdiction set decarbonisation targets and strategies?

Yes, to reduce Indonesia’s carbon emissions by 31.89% (unconditionally) or by 43.2% (conditionally) compared to ‘business-as-usual’ CO2 emissions. This target was included in Indonesia’s enhanced Nationally Determined Contributions (NDC), which is the transition toward Indonesia’s Second NDC, which will be aligned with the Long-Term Low Carbon and Climate Resilience Strategy (LTS-LCCR) 2050 with a vision to achieve net-zero emissions by 2060 or sooner.

2. Are there carbon trading markets? If so, please give details. If not, are there plans for such markets?

There are expected to be carbon trading markets in Indonesia, but they are still in the planning stages as of this publication. Both compliance and voluntary carbon markets are contemplated, with the compliance carbon market initially limited to coal-fired power plants and later to expand to other types of power plants from 2025.

The carbon exchange (bursa karbon) to be created will be licensed by OJK, which is mandated to prepare the necessary regulations to implement carbon trading through the carbon exchange.

In summary, as currently contemplated, the carbon exchange will be a system that:

(a) regulates carbon trading;

(b) records ownership of carbon units;

(c) develops carbon trading infrastructure;

(d) regulates state revenue deriving from carbon trading; and

(e) administers and oversees carbon trading
transactions.

3. Are there mandatory requirements for transition plans and/or their disclosure? If so, please give details (including whether there is any standard or guidance on transition plans and/or requirement to consider the social impact of the plan). If not, are there plans for such requirements?

There is no mandatory requirement to have a transition plan. However, information on the sustainability-oriented strategy/planning of a company must be included in the Sustainability Report submitted to the OJK, though the standard format/content is not strictly regulated. It is not mandatory to include any consideration of the social impact of the sustainability-oriented strategy/planning.

4. Are there mandatory requirements to set, meet and/or disclose climate-related targets? If so, please give details. If not, are there plans for such requirements?

No, there is no mandatory requirement to independently set and meet climate-related targets such as emission reduction or energy transition. Nonetheless, a company must disclose any sustainability-oriented strategy in its Sustainability Report.

Aside from independently set targets, certain companies in identified industries are required to meet and comply with a government determined emissions ceiling, which relates to the cap-and-trade and/or cap-and-tax mechanism for Indonesia’s carbon trading schemes. For instance, in the coal-fired power plant sector, the Ministry of Energy and Mineral Resources will issue an emissions ceiling technical approval. Companies subject to this emissions ceiling must ensure their GHG emissions comply with the determined ceiling. Companies that do not comply will be subject to a carbon tax (which is yet to be implemented) or they will need to purchase emissions reduction credits from other companies to offset their excess emissions.

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

5. Other upcoming developments / direction of travel

The OJK is developing the logistics and legal infrastructure to implement a carbon exchange.

The imposition of a carbon tax for coal-fired power plants, which was 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 that will be subject to this carbon tax.

We also note that the mutual recognition agreement/mechanism between the Indonesian Ministry of Environment and Forestry and carbon credit certification bodies is still being finalized, pending which, international carbon trading with carbon credits issued by non-national certification bodies is, for all intents and purposes, barred.

C. Greenwashing risks

1. Are there any recent examples of legal proceedings, regulatory actions or investigations against or into greenwashing in your jurisdiction?

No.

2. Are there any laws or regulations specifically dealing with greenwashing?

No.

3. What are the likely grounds on which such proceedings, action or investigations can be instigated?

Likely grounds include:

(a) Breaches of directors’ fiduciary duties.

(b) Tort claims for misrepresentation.

(c) Criminal provisions on fraud, whether provisions on capital market-related fraud under the Capital Markets Law or general fraud provisions under the Criminal Code.

4. Other upcoming developments / direction of travel

Although there have been no major greenwashing claims in Indonesia to date, the risk of claims against companies, in particular, listed companies and financial institutions, is expected to increase as reporting requirements become more robust and the sense of urgency on sustainability continues to grow, subjecting companies to greater public scrutiny.

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This material is provided for general information only. It does not constitute legal or other professional advice.

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