Introduction
Environmental, Social and Governance (ESG) was first introduced and popularized through the report document titled “Who Cares Wins”, published under the United Nation (UN) Global Compact at the initiative from the UN Secretary General in 2004. This report was intended as a guideline and recommendation for integrating environmental, social, and governance aspects into investment decisions.

Over time, stakeholders, including investors, have increasingly recognized the significance of sustainability factors as a key factor in assessing the risks and prospects of a company. This shift has encouraged companies to demonstrate their commitment to sustainable risk management by adopting ESG principles through ESG reporting.

ESG reporting is conducted through an ESG report, which provides various information regarding a company’s operations and their impact, assessed based on ESG criteria. This report is then evaluated by ESG Rating Agencies, which generate an ESG Rating. The results of this assessment will subsequently serve as a key parameter in investment decision making.

The implementation of ESG presents significant opportunities for companies. In addition to increasing investor appeal, incorporating sustainability principles into ESG also strengthens corporate reputation. This is why more countries are increasingly encouraging the implementation of ESG among their corporation. The European Union, for instance, has mandated ESG compliance for its member states as part of its broader sustainability policy framework.

In Indonesia, while an increasing number of companies are starting to adopt ESG, its implementation continuous to encounter various challenges. One of the most significant challenges is the lack of comprehensive and structured regulations. While the government has recognized the importance of ESG and encourage its implementation, without a clear and well-directed policy, ensuring the effectiveness of ESG implementation will be difficult to achieve optimally.

Discussion
The existence of regulations will play a crucial role in ensuring the successful implementation of ESG. A well-defined policy framework, regulation, and established standards can provide a structured mechanism for ESG implementation, ensuring that it is applied effectively and achieves its primary objectives comprehensively.

When considering the development of ESG implementation in other countries, as mentioned above, the European Union has mandated ESG reporting requirements, which came into effect in 2024, through the European Sustainability Reporting Standards (ESRS), adopted in 2023. ESRS has sets out detailed requirements and procedures for ESG reporting, covering all ESG aspects, which serve as the basis evaluation. This regulatory framework establishes a standard designed to ensure transparency and corporate accountability in disclosing their sustainability impact, thereby providing reliable information for investors and other stake holders.

In Indonesia however, whilst there are no adequate regulations when compared to ESRS, the government has started to recognize ESG through various national policies and regulations, such as the Financial Service Authority Regulation Number 17 of 2023 on the Implementation of Governance for Commercial Banks, Guidelines for Assessing the Implementation of ESG Factors in State-Owned Enterprises, Financial Service Authority Regulation Number 51/POJK.03/2017 on the Implementation of Sustainable Finance for Financial Services Institutions, Issuers, and Public Companies, Sustainable Finance Roadmap Phase II (2021-2025) of the Financial Service Authority, along with the Ministry of Finance’s Environmental, Social, and Governance Framework and Manual.

Despite these efforts, the existing regulations and policies remain largely declarative and do not provide clear guidance on the ESG standards, indicators, and evaluation methodologies. Additionally, ESG principles have only been implemented in sectoral manner, without a comprehensive framework to ensure consistency across various industries.

On the other hand, ESG recognition in Indonesia has also been evident in the capital market through the Indonesia Stock Exchange (IDX). This is reflected by the introduction of various stock indices based on ESG standards to promote sustainable investment practices, including the Index of SRI-KEHATI, ESG Sector Leaders IDX KEHATI, ESG Quality 45 IDX KEHATI, and IDX ESG Leaders.

Beyond the government’s recognition of ESG, IDX’s initiative in launching ESG based indices demonstrate that ESG implementation in Indonesia has already reached the stage of active application in investment practice. However, the main challenge remains in the absence of clear and structured regulations to govern the comprehensive implementation of ESG. While ESG is intended to enhance corporate credibility and provide transparency for stakeholders, the lack of regulation and well-defines implementation guidelines, measurable performance indicators, detailed evaluation methodologies, and government oversight may undermine the effectiveness of ESG reporting. Without adequate regulation, ESG report could result in lacking credibility and being misused, ultimately deviating from their primary objective as an instrument for promoting sustainability and accountability.

Closing
The absence of clear implementation guidelines or specific regulations governing ESG in Indonesia hampers its effectiveness and the benefits that companies should gain from its adoption. Ideally, ESG and investment decisions should be closely interlinked, as reflected in current global market trends. However, in Indonesia, stakeholders have yet to fully consider ESG assessments as a key factor in investment decision-making.

To date, ESG implementation in Indonesia remains inconsistent and lacks full integration. If the government truly aims to maximize ESG adoption, efforts must go beyond mere recognition or sectoral policies that lack a strong legal foundation. The government must establish clear and comprehensive ESG regulations tailored to the conditions and characteristics of corporate activities in Indonesia. With a well-structured regulatory framework, ESG will not merely remain a concept or trend but will instead provide tangible benefits for companies, enhance transparency for stakeholders, and contribute significantly to Indonesia’s sustainable economic development.

Miskah Banafsaj

Sources:

  • Financial Services Authority Regulation No. 51/POJK.03/2017 of 2017 on the Implementation of Sustainable Finance for Financial Institutions, Issuers, and Public Companies.
  • Financial Services Authority Regulation No. 17 of 2023 on the Implementation of Governance for Commercial Banks.
  • United Nations Global Compact. Who Cares Wins: Connecting Financial Markets to a Changing World. 2004. New York: United Nation.
  • Financial Services Authority. Roadmap Keuangan Berkelanjutan Tahap II (2021-2025). 2021. Jakarta: Financial Services Authority.
  • Ministry of Finance, Directorate General of Budget Financing and Risk Management. Kerangka Kerja Lingkungan, Sosial, dan Tata Kelola (LST) pada Dukungan dan Fasilitas Pemerintah untuk Pembiayaan Infrastruktur. 2022. Ministry of Finance.
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