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Anticipating the global convergence in ESG reporting framework
Albeit the PRI, the "official" principles for ESG, is supported by the UN to promote more-sustainable investment and business operation, there is no binding agreement that can hold all entities to adopt the ESG framework.
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Not-so green: Skyscrapers are seen from green-residential area in Jakarta on Jan. 28. Green space is estimated to account for less than 10 percent of the city’s land, putting Jakarta’s sustainability as a safe place to live at risk. (JP/Seto Wardhana)
T
he COVID-19 pandemic struck in 2020, when we were rethinking and resetting how we do business and live. Sustainability started to become the next big thing everywhere. Major investors and organizations shifted their attention to not only consider profits in decision making, but also other non-financial benefits.
In Indonesia, the trend picked up way before the pandemic began. The Indonesia Stock Exchange (IDX) and KEHATI Foundation launched the "SRI-KEHATI” (JKSRI) index on June 8, 2009. The index is an environmental, social and governance (ESG)-based portfolio index that consists of selected stocks with good ESG performance and in line with the United Nations’ Principles of Responsible Investment (PRI).
The index is one of the four ESG-based indices IDX has issued in Indonesia so far and is among the highest-performance indices. The top-three constituents of SRI-KEHATI constituents, namely PT Bank Central Asia (BBCA), PT Telkom Indonesia, Tbk. (TLKM), and PT Astra International Tbk. (ASII) are among the top-10 largest market-capitalization companies in Indonesia, valued at around US$69.83 billion, $26.33 billion and $16.22 billion respectively (companiesmarketcap.com, 2022).
Not only does this number depict the significance of those ESG-listed businesses in Indonesia's economy, but it also indicates the growing notion of Indonesian companies and consumers’ capacity to contribute to the planet’s sustainability.
In general, the ESG metric (score or rating) is derived from each unique environment (E), social (S) and governance (G) indicator, and then aggregated by a particular weight. Environmental criteria measure a company’s performance in reducing their downside impacts on the environment from their business activities, e.g., climate-change policies or waste management. Social criteria examine how companies manage their relationship with employees, customers and other stakeholders. Governance criteria talk about a company’s performance in leadership, internal control, shareholders’ rights and other matters involving the company’s management.
The ESG score is simply a practical tool to discover which company has the best ESG performance within the industries and to provide a clear signal for investors who opt to fund more-sustainable companies.
Despite the convenience, some doubt persists over the efficacy of ESG scores for various reasons. First, disclosing whether one’s business process follows ESG frameworks is voluntary. Albeit the PRI, the "official" principles for ESG, is supported by the United Nations to promote more-sustainable investment and business operation, there is no binding agreement that can hold all entities to adopt the ESG framework.
