Jakarta – Business enterprises have been bombarded with numerous sustainability standards globally, with the importance and prevalence of different areas varying from one sector to another. Indonesian companies, notably those engaged in the exploitation of natural resources, are familiar with the principles of economic, social and environmental sustainability.
There is also the requirement called corporate social responsibility, which is stipulated in the Indonesian 2007 Companies Law. The European Union will soon impose regulations on deforestation as part of environmental sustainability. The Indonesian government enforces its own sustainability principles in oil palm development.
The essence of all these principles of sustainability basically refers to good corporate governance (GCG), which over the past few years has largely been developed at a global advanced-market level into a more comprehensive set of the principles of environmental, social and governance (ESG).
ESG measurement, which is not yet popular among the Indonesian business community, is the comprehensive review of a company's sustainability performance to determine its ESG impacts. It is intended to provide stakeholders, such as investors and customers, with a clear idea of the state of a company as regards its compliance with sustainability in its broadest sense.
Most of the ESG principles were actually embodied in the voluntary Global Reporting Initiative (GRI) Sustainability Reporting Standards, which was established in 2016 by the Global Reporting Initiative to support best practices in impact disclosure. Covering topics from tax to emissions, anticorruption, biodiversity, occupational health and safety and human rights, this aims to offer a flexible framework for creating integrated ESG reports.
Media reports showed globally, the percentage of retail and institutional investors that apply ESG principles to a quarter or more of their portfolios leapt from 48 percent in 2017 to 75 percent in 2019. In 2018, sustainable investing assets totaled 10.9 trillion euros (US$10.1 trillion) in Europe and $8.7 billion in the United States. Deloitte even predicted ESG assets in the US were expected to hit $25.3 trillion by 2025.
With so much value being placed on sustainable investing, investors now tend to closely assess or monitor the performance of companies or a country where they intend to invest or set up businesses. Good or certified ESG performance reports will help them to better identify companies likely to see good financial performance in the long-term due to their ESG-focused business models.
The Indonesian Chamber of Commerce and Industry (Kadin) should therefore work together to promote ESG among the business community in a bid to make the country an attractive and viable place for long-term investment in the development of natural resource-based manufacturing industries.
ESG is now considered the bedrock of GCG, which itself is the foundation of a market economy as it embodies the rules and practices that govern the relationship between the managers and company shareholders as well as stakeholders like employees, pensioners and local communities and ensures transparency, fairness and accountability.
Unless the enforcement of existing laws is not strengthened to build up stronger GCG system within the business sector, even the omnibus law on job creation may be rendered less effective to boost investment. Many studies have concluded there is a link between improved corporate governance and more predictable investment flows, and the long-term competitiveness of the financial service industry.
It should be emphasized that what the principle of governance means is good governance in both the private and public (government) sectors. It would be extremely difficult for the private sector to run with good governance principles under a bad governance in the public sector.
GCG is a prerequisite for the integrity and credibility of market institutions. By building confidence and trust, good governance allows the corporation to have access to external finance and to make reliable commitments to creditors, employees and shareholders. It is this contract that underpins economic growth in a market economy.
When this trust is undermined, lenders and investors lose their appetite for risk, and shareholders offload their equity, resulting in lost value and reduced availability of capital. Companies therefore should have a strong ESG reporting plan and create clear reports for investors and other stakeholders.