The severe floods that recently hit Sumatra and Aceh are a stark reminder that environmental damage can trigger widespread social and economic consequences. Alongside heavy rainfall, illegal logging and mining practices have diminished the water-absorption capacity of upstream areas, making flash floods inevitable. This situation proves how investment decisions can no longer rely solely on financial metrics like return on equity, return on assets, or other profitability indicators.
What Is Responsible Investment?
Responsible investment focuses on directing capital toward sustainable business sectors. This investment approach considers three core pillars, which are environmental, social, and governance (ESG).
Through mandatory ESG reporting, companies not only disclose their financial status but also communicate their policies and positions on environmental, social, and governance issues. These reports provide investors with a basis to evaluate how well companies adhere to good corporate governance and ethical business practices.
History of ESG Development
The ESG concept is rooted in a long tradition of ethical investing that dates back to the 18th century. In 1758, Quaker communities in the United States prohibited investments in businesses considered immoral, such as the slave trade. By the 20th century, the socially responsible investing (SRI) movement began gaining momentum.
During the 1960s and 1970s, public protests against the Vietnam War and racial discrimination led investors to divest from companies that violated civil rights. The 1980s saw the emergence of sustainability as a significant concept worldwide. In 1987, the UN Brundtland Commission's report, Our Common Future, defined sustainable development, laying the groundwork for the environmental aspect of ESG. This decade also witnessed increased scrutiny of industrial disasters, such as the Bhopal gas leak in 1984 and the Exxon Valdez oil spill in 1989.
Moving into the 1990s and 2000s, major corporate scandals such as Enron and WorldCom shifted global attention to governance reforms. International initiatives, such as the UN Global Compact, launched in 2000, further solidified the foundation of modern ESG.
A notable milestone in ESG came in 2004 when UNEP FI published its "Who Cares Wins" report, marking the first official use of the term ESG. Two years later, the UN introduced the Principles for Responsible Investment (PRI), prompting hundreds of global investment managers to adopt ESG into their decision-making standards.
ESG Development in Indonesia
While ESG has become an international standard, in Indonesia, mandatory sustainability reporting has primarily been established for the financial industry through POJK 51/POJK.03/2017. This regulation requires financial services institutions, issuers, and public companies to submit sustainability reports.
The regulation also outlines eight principles for implementing sustainable finance reporting:
- Principles of responsible investment
- Principles of sustainable business strategies and practices
- Principles of social and environmental risk management
- Principles of governance
- Principles of inclusiveness
- Principles of developing priority leading sectors
- Principles of coordination and collaboration
Before submitting a sustainability report that includes ESG components, companies in the financial industry must also submit an annual sustainable finance action plan by January 31, as part of their commitment to good corporate governance.
Below are some frequently asked questions to help provide more context on ESG application in Indonesia.
What is environmental, social, and governance (ESG)?
ESG is an investment framework based on three main pillars, including environmental, social, and governance. It encourages investors to factor in sustainability and ethical business practices when making investment decisions.
Is ESG reporting mandatory in Indonesia?
Yes. However, the obligation to report sustainability through ESG reports currently applies only to financial services institutions, issuers, and public companies under POJK 51/2017.
Why is ESG important for investment decisions?
ESG matters because investment evaluations should not rely solely on financial data. Environmental, social, and governance factors can influence a company's long-term risk profile and sustainability, particularly in preventing adverse impacts like environmental degradation.
