To amplify sustainability disclosure and promote corporate integrity, countries in the Asia-Pacific region are progressively refining their regulatory frameworks on corporate sustainability.
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Petra Christi
Business Analyst, ClimateWorks, Monash Sustainable Development Institute
However, the response has been slower from some corporations and financial regulators in the region, including some in Indonesia - the world's third-largest democracy.
Around the world, a wide range of comprehensive voluntary frameworks and standards are in use. Progressively, however, participation is no longer optional - it's becoming a requirement.
In addition to sustainability reporting in jurisdictions across the Asia-Pacific region, environmental, social and governance (ESG) disclosure elements are increasingly being enforced by policymakers.
Some of those policies include frameworks from institutions, such as:
- The Global Reporting Initiative (GRI)
- Sustainability Accounting Standard Board (SASB)
- Task Force on Climate-related Financial Disclosures (TCFD).
These frameworks focus on shaping guidelines and principles related to key aspects of overall ESG and corporate sustainability.
Indonesia has made some efforts to establish several sustainability and ESG-related policies, but an improvement in corporate sustainability integrity is still needed. This need is reflected in some of the questions being asked by the public when evaluating these regulations:
1. How have these policies created opportunities in improving the overall sustainable integrity and disclosures?
2. How could those policies be made more effective?
The Indonesian sustainable finance roadmap
The Indonesian Financial Services Authority (OJK) established the sustainable finance roadmap in two phases (2015-2019 and 2021-2025).
It serves as the foundation for policymakers to further develop a binding sustainable finance regulatory framework, climate-related financial disclosures that go beyond sustainability reports, financial instruments/incentives, and an enabling environment for corporate action and disclosure.
The roadmap presents high-level initiatives and opportunities to promote ministerial and institutional collaboration through the creation of sustainable finance mechanisms.
Several initiatives include Regulation No. 60/POJK.04/2017 regarding the Issuance and Requirements of Green Bonds, and carbon exchange infrastructure.
However, the absence of key climate-related indicator mandates may affect the disclosure of corporation emission reduction activities and the integrity of their performance.
This is especially important given public wariness regarding greenwashing. When disclosed information does not properly reflect underlying sustainability risks and impacts, it places that company's reputation at risk.
Currently, only a handful of listed banks have recognised the environmental and social impact associated with the provision of their financial products. There's still a lack of assessment on climate-related risks through forward-looking scenario analysis that measures banks' exposure to climate-related physical and transition risks, and the impact on financial stability.
With suitable indicators, the roadmap can present compelling opportunities to further multi-stakeholder collaboration and offer synergies between state and non-state actors.
It can also ensure the integrity of sustainability disclosures, address challenges in the supply and demand of green products, thus improving the readiness between investors, corporations and green project developers to pursue sustainable business.
Disclosing high-integrity sustainable finance products
OJK's regulation on Sustainable Finance Applications (POJK 51) obliges financial services to enact a Sustainable Finance Action Plan, and to report them on an annual basis.
Based on WWF's Sustainable Banking Assessment (SUSBA) analysis, the eight largest Indonesian banks currently fulfil only about one-10th of the TCFD-related criteria. None of them has set a science-based target and net zero target by a specific timeline.
The establishment of this mandate sets an obligation for several entities to implement and conduct sustainable financing in their businesses. This then provides a push for the wider financial sector's involvement in green investment.
In the near future, there's potential for this regulation to be mandated beyond financial institutions, to include publicly-listed entities.
Although POJK 51 has made progress in encouraging financial actors to begin publishing sustainability reports, there's still room for regulatory improvement.
Ideally, entities would be required to adopt a standardised reporting and target-setting framework, aligned with international standards. Disclosing climate-related risks and opportunities is integral to TCFD recommendations, as these will likely impact an organisation's current and future financial position.
Risk management and opportunity-seizing strategy information disclosed by the entities are important for investors, lenders, and insurance underwriters to make more informed financial decisions.
Standardised reporting formats
A standardised disclosure format for the wider industry sector will allow policymakers to compare actors' financial and sustainability performance objectively, distinguishing climate leaders versus laggards, and preventing greenwashing.
A better alternative would be to use interoperable and compatible climate-risk assessment metrics that fit both national and international standards. This may require merging SDGs indicators, the Public Disclosure Program for Environmental Compliance (PROPER) by the Indonesian Ministry of Environment and Forestry, TCFD recommendations, and GRI standards.
In addition, by requiring actors to adopt the Science-based Target initiative (SBTi) and work towards aligning their portfolio, the regulator will then be able to assess whether the submitted plan meets Paris-aligned goals.
Capacity building
As Indonesia moves forward in developing green policies, including the Green Taxonomy, capacity-building becomes necessary for providing an integrated understanding between sustainability, climate-related disclosure, and navigation regarding sustainable finance opportunities.
Capacity-building should be both a prerequisite and an enabling factor that regulators and policymakers provide from the outset.
Regulators can then continue to capacity-build and formulate improvements to already existing green policies. This is because entities and investors become more aware of climate-related measures and climate-risk assessment indicators, such as clearer thresholds, tightened metrics, and timelines to a staged transition towards sustainability requirements.
The Climateworks Centre provides technical assistance to the Badan Pengawasan Keuangan Pembangunan (BPKP), the state financial regulator, to improve the sustainability reporting practice and craft the ESG Supervision Framework as a guidance to supervise the decarbonisation effort of Indonesian state-owned enterprises.
