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ESG-based green financing for sustainable development
The fulfillment of ESG standards will reduce the potential for certain short-term and long-term responsibilities, such as claims of environmental hazards or pollution lawsuits from the community.
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On fire: A man walks past burning peatland in Kampar, Pekanbaru, Riau, on April 1, 2022. The business sector has been encouraged to follow economic, environment and governance standards in their operations. (AFP/Wahyudi)
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ecently, investment feasibility rating agencies such as S&P have started to incorporate compliance with environmental, social and governance (ESG) standards into investment feasibility components.
Ethan Rouen (2023) states that ESG is a standard measure of a company’s sustainability level divided into three major components, namely environment, social and governance. Furthermore, George Serafeim (2022) says that theoretically ESG is a form of refinement of John Elkington’s stakeholder theory.
The environment and social elements are considered an adaptation of the planet (environment) and people (social) elements, respectively, which are part of the 3P elements (people, planet, profit) in Elkington’s stakeholder theory. The ESG standards introduced the governance element serve as an addition. ESG also provides concrete technical measures in determining whether those standards are fulfilled or otherwise, while Elkington’s stakeholder theory is only considered a “concept” on which green financing is based.
Currently, the ESG measures accepted in the international community are the measures made by the Global Reporting Initiative (GRI), a nonprofit institution, which are also being refined from time to time until today.
Broadly speaking, there are four major GRI standards, namely GRI 100 (on the standards for disclosures and reporting details), GRI 200 (governance and economic measures), GRI 300 (environmental standard measures) and GRI 400 (social standard measures).
ESG was introduced in the context of financing law based on the sustainable development goals (SDGs) which are governed under Presidential Regulation No. 59/2017 on the SDGs. On a practical level, the fulfilment of ESG standards are also required pursuant to the Basel Standards (worldwide financing condition standards) as a measure of risk management to mitigate the potential of non-performing loans.
Indonesia has also started to require the fulfilment of ESG standards in investment and financing, as evident in the Financial Supervisory Authority’s (OJK) move to issue a number of regulations reflecting the same. Among them are OJK Regulation No. 51/2017 on the implementation of sustainable financing for financial services institutions, issuers and public companies; OJK Regulation No. 60//2017 on the issuance and requirements for green bonds; and OJK Board of Commissioners Regulation No. 24/2018 on the issuance of green bonds.
