Sustainability matters: increasing awareness of businesses in Indonesia
Concerns about the environmental, social and economic impact of climate change and the importance of sustainability issues more broadly continue to rise up the agendas of governments and organizations around the world, including in Indonesia.
During the international climate negotiations at the UN’s Conference of Parties (COP21) in Paris, Indonesia committed to achieving a 29 percent reduction in carbon emissions by 2030, this has increased the need for responsive participation by government and private sector players alike in meeting the targets and more widely in planning for ways to adapt and manage the risks from climate change impacts. More broadly, Indonesia is a strong advocate of the Sustainable Development Goals and is committed to achieving them and improving livelihoods for the poorest communities. In this context, there is very clearly a spot light on how businesses in Indonesia can better understand these issues and develop their approach to sustainability in ways which can both accelerate their own growth and that of the wider community.
Businesses face actual and prospective regulatory requirements and the need to meet stakeholder expectations, as well as respond to the strategic risks and opportunities sustainability presents. These translate to fundamental and complex transformation for many organizations in Indonesia, particularly embedding sustainability into core business activities to achieve short-term objectives and create long-term shareholder value.
Sustainability reporting trends
Globally, increasing challenges resulting from macro geopolitical, social and environmental events (i.e., climate change, natural resource depletion, supply chain impacts, economic instability, and the pressures of a growing population) have encouraged stakeholders (e.g., regulators, NGOs, investors) to become more interested in understanding how organizations are managing their sustainability risks.
In Indonesia, a growing number of business entities themselves have started to respond to the sustainability issue. These entities include closely-regulated businesses (conscious of relevant regulatory compliance), joint ventures, private businesses with large foreign creditors, local subsidiaries of multinationals, as well as other companies (state-owned or private) concerned about demonstrating good corporate governance. While some of these companies have responded to the trend and demand for information by disclosing a variety of environmental, social and governance data on their operations, others have still done little or nothing.
Sustainability reporting is gaining traction globally with the development of the Global Reporting Initiative (GRI) sustainability reporting framework. Regulators and stock exchanges around the world are introducing sustainability reporting requirements. Although not yet mandated in Indonesia, there has been a growing number of voluntary reporters in the country. While there is a requirement in Indonesia for all listed companies to report on Corporate Social Responsibility (CSR) activities, a report on company CSR activities alone is not considered to be a sustainability report.
Whereas sustainability reports commonly focus on social, environmental and economic aspects of organizations’ operations (e.g., releasing a variety of information ranging from energy conservation, paper recycling, community welfare activities, etc.), there is little regard by most reporting entities to emphasize the relative importance of these disclosures to their business’ performance or to the relative importance of each aspect to their stakeholders.
The market desire to see good quality focused reporting was highlighted in EY’s “2015 Global Investor Survey”, which found that investors face a severe deficit of useful non-financial information. With stakeholders driving the push for more targeted and relevant non-financial disclosures, regulators and voluntary reporting organizations have responded accordingly by producing global standard reporting guidance which focuses on the principle of materiality – an underlying foundation for good sustainability disclosure.
Materiality, from a sustainability stand point, takes into consideration a much broader stakeholder perspective and examines the aspects from both an internal and external lens. It assesses the potential impact of an aspect on the business, and also considers the importance of the aspect to stakeholders.
Converging developments in Indonesia’s sustainability agenda
Based on EY Indonesia’s recently released study on “Sustainability reporting”, the converging developments in Indonesia’s sustainability agenda include six influencers:
- International initiatives and regulatory trends
Global initiatives are supporting sustainable development. Indonesia is involved in a range of global sustainability related initiatives including the Sustainable Development Goals (SDGs) and United Nations Framework Convention on Climate Change (UNFCCC).
The UNFCCC Conference of Parties (COP) 21, Paris Agreement, agreed to reaffirm the goal of limiting global temperature increase to well below 2°C and urge efforts to limit to 1.5°C. Indonesia has ratified the Paris Agreement and committed to reduce emissions by 29%, compared to business as usual, by 2030.
The regulation and standardization of sustainability disclosures is also gaining traction with many stock exchanges (with Singapore being closest to home) together with regulators, requiring sustainability reporting.
- Global Reporting Initiative (GRI)
The GRI has become the most commonly used international framework for sustainability reporting. The latest iteration of its guidelines, GRI G4, was released in 2013 with materiality as a fundamental guiding principle.
One evident feature in the GRI G4 compared to the prior framework, is the ability for companies to choose the ‘in-accordance’ level of disclosure (core or comprehensive) which gives more autonomy for companies to decide their level of disclosure and develop over time.
In 2016, GRI updated its GRI G4 Sustainability Reporting Guidelines into GRI Standards. The Standards are to be used from 1 July 2018 onwards.
- Sustainable finance roadmap
The Financial Services Authority (OJK) in Indonesia has cooperated with several institutions to prepare a sustainable finance roadmap to enable financial services institutions (FSI) to enhance sustainability.
The roadmap will give priority to sustainable lending instruments, such as for renewable energy, agriculture, manufacturing, infrastructure, and the small and medium enterprises (SMEs) sectors.
One target in the roadmap is for the issuance of sustainability reports to become mandatory to improve transparency within the FSI in particular.
- Integrated reporting
The International Integrated Reporting Council (IIRC) was established in 2010 and released the international Integrated Reporting <IR> Framework in December 2013. Adoption of the framework is gathering momentum with materiality underpinning its vision to report on the factors critical to value creation across six “capitals” – financial, manufactured, intellectual, human, social relationship, and natural.
In 2011, the ASEAN Corporate Governance (CG) Scorecard was introduced. The scorecard was initiated by the ASEAN Capital Markets Forum (ACMF) for the development of an integrated capital market and promote ASEAN as an asset class. The scorecard hopes to raise CG standards of publicly listed companies in ASEAN countries and increase their visibility to investors. Sustainability reporting is one of the criteria being assessed in the scorecard.
- Sustainable Stock Exchange and Indices
The Sustainable Stock Exchanges (SSE) initiative is a working partnership between the UN, UN-supported organizations, stock exchanges, investors, companies, regulators and governments. The SSE initiative serves as a platform for stock exchanges to enhance corporate transparency on Environmental, Social and Governance (ESG) issues to encourage sustainable investment.
There is also a growing trend of sustainability indices globally, the most prominent being the Dow Jones Sustainability Index (DJSI). The DJSI was launched in 1999, evaluating the sustainability performance of the largest 2,500 companies listed on the Dow Jones Global Total Stock Market Index.
The Indonesia Stock Exchange (IDX) introduced its own sustainability index in cooperation with Biodiversity Indonesia Foundation (KEHATI) in June 2009, known as SRI KEHATI index. There are currently 25 companies listed in the index.
- Stakeholder pressure
According to our research, investors have become more focused on non-financial performance in the last two years and are increasingly using non-financial information for decision making. The pressure from investors for more non-financial disclosure from companies is also increasing, with the prospect of more competitive lending to those companies that are more transparent and which perform better on sustainability.
More companies voluntarily provide non-financial information in an effort to respond to expectations and build reputation with regulators, investors, customers and other stakeholders.
Sustainability reporting and materiality assessments should be viewed farther and beyond reporting for the use of external stakeholders. It should as well be viewed by businesses as a report to drive internal strategy and improve performance.
For more information please refer to EY’s Climate Change and Sustainability Services on the website.