ESG: The Importance of Sustainable Principles for Business
The history of the formation of ESG begins with the global aspiration to achieve sustainable development, including climate resilience, clean water and air, poverty reduction, and preserving resource availability for the future.
This moment was formed during the gathering of 193 countries at the UN Headquarters on September 25, 2015. From this assembly emerged the document "Transforming Our World: The 2030 Agenda for Sustainable Development."
To realize these aspirations, the concept of ESG was established for implementation by the private sector in the operation of companies.
Understanding ESG and the Importance of Its Implementation
ESG stands for Environmental, Social, Governance. ESG serves as a standard or guideline for companies in conducting investment procedures. There are three main criteria in ESG, namely the company's relationship with the environment (Environment), society (Social), and transparent management (Governance).
The goal of ESG is to measure the social and sustainability impact of the company's investments. Companies that meet ESG standards will certainly integrate these three criteria into their business and investment practices. ESG is also applied during policy implementation.
ESG is now increasingly popular among investors, ranging from regional to global levels. Initially, ESG emerged in response to the need for sustainable economic development. Private companies responded to this by formulating guidelines and standards considered capable of providing solutions in this regard.
ESG also has several other terms with the same meaning, including ESCG (Environmental, Social, and Corporate Governance), RBC (Responsible Business Conduct), CSV (Co-Shared Value), and Impact Investing.
At first glance, the meaning of ESG is similar to CSR (Corporate Social Responsibility). However, ESG and CSR are actually different in principle and purpose. CSR is more of a social responsibility that is not related to the company's operations from the start, but rather a kind of moral debt towards the negative impacts that have been caused to the environment and society. Meanwhile, ESG is applied as a concept from the beginning to the end of business processes, including operations.
After knowing what ESG means and what it stands for, you also need to know what the criteria are. As mentioned above, there are three criteria in ESG, namely Environment, Social and Governance. These three criteria must be met so that the company is more focused in carrying out the investment process. The following are the ESG criteria:
1. Environment
The first criterion that must be met in the implementation of ESG is the Environment. This means that companies must always be aware of the impact of their activities on the environment. This criterion focuses on how a company's activities can be carried out in an environmentally friendly manner.
For example, waste should not pollute the area around the factory, and the products produced should not harm the environment. Another example is that companies should not use animals as part of experiments and should not harm animals in the production process. This applies most to food and cosmetic companies.
Moreover, in their operations, companies can choose to use environmentally friendly energy sources, such as solar panels for power generation. The company's commitment to implementing the Environment criterion of ESG, in turn, will result in benefits for the company.
2. Social
The next criterion is Social. This means that, socially, a company is capable of building social relationships with the affected community and institutions related to the company. This also includes the company's relationship with its employees, as well as consumers, clients, and the community.
How a company positions itself in the social environment will significantly impact the company's image and may even influence the financial gains obtained. For example, a company operating in the energy sector regularly conducts inspections related to employee safety. The company also needs to be aware of issues related to employment to bridge the desires of employees and align them with the company's interests.
3. Governance
Lastly, Governance, or corporate governance, is equally important in ESG. Corporate governance involves how a company builds and manages its business through a well-structured organizational framework and quality leadership.
Several aspects to consider in this criterion include company policies, corporate standards, culture, disclosure, information, audit processes, and compliance. This good governance should be applied across all divisions or departments within a company.
For instance, during significant decision-making that involves all areas, leaders can take a middle ground through fair policies for all parties, avoiding potential conflicts of interest. Another example is transparent financial management in the company.
The implementation of ESG in a company is crucial because consumers, employees, investors, or the younger generation tend to choose companies that can make a positive impact and gain profits in an ethical manner.
Challenges and Opportunities for Implementing ESG in Indonesia
The implementation of ESG is not easy as it requires knowledge, and in Indonesia, the understanding of ESG is still not optimal. According to a survey by the Indonesia Business Council for Sustainable Development (IBCSD) in 2021, the ESG Index of Indonesia ranked 36th out of 47 capital markets worldwide.
Moreover, supported by another IBCSD survey, it was found that 40% of companies in Indonesia are still not aware of the importance of implementing ESG. Research conducted by the Mandiri Institute on asset managers in Indonesia revealed limited knowledge about the impact of ESG in improving investment decision-making. The survey also indicated a lack of understanding and difficulty in obtaining ESG-related data.
Not only that, but the Mandiri Institute's research also mentioned various other challenges in implementing ESG, including:
- Difficulty in determining criteria.
- Difficulty in integrating ESG factors into quantitative models.
- Lack of incentives such as projects, funding, and ESG policies.
- ESG is perceived as not contributing significantly to a company's financial performance.
- Not relevant to the current conditions of the company.
- Lack of demand from stakeholders.
- Relatively limited long-term benefits for the company.
Government Policies to Support the Implementation of ESG
In Indonesia, the development of ESG implementation continues to progress. This is evident from the increasing number of sustainable investments involving critical aspects of ESG. Companies that can effectively implement ESG aspects will have sharp insights into long-term strategic issues. This will positively impact the management of the company's long-term goals.
Furthermore, as reported by the official website of the Coordinating Ministry for Economic Affairs of the Republic of Indonesia, there is a growing awareness among investors and policymakers about the importance of investing in businesses that adopt Environmental, Social, and Governance (ESG) measures to protect businesses from unforeseen risks in the future. ESG-themed investments are also experiencing an upward trend as investors become more concerned about sustainability issues.
The commitment of the Indonesian government is also demonstrated by the inclusion of the Energy Transition topic as one of the priority issues for the G20 Presidency. The Indonesian government acknowledges that facing various global challenges and striving to achieve sustainable development goals require synergy and close collaboration between the government and the business sector.
As quoted from the official website of the Coordinating Ministry for Economic Affairs of the Republic of Indonesia, Coordinating Minister Airlangga stated that the Indonesian government is ready to apply ESG principles to support sustainable and resilient infrastructure. However, private sector involvement is also needed to adapt to the quality standards of SDGs (Sustainable Development Goals).
Implementation of ESG in Indonesia
The application of ESG principles represents Indonesia's tangible response to the challenges of climate change, the demand for sustainable financial practices, and the promotion of sustainable development targets in Indonesia. By implementing ESG, Indonesia can maintain environmental sustainability, reduce carbon emissions, and mitigate other negative environmental impacts.
Moreover, the application of ESG can enhance social well-being by respecting human rights and ensuring decent working conditions. It also provides long-term benefits to the Indonesian economy by encouraging responsible investments and strengthening good corporate governance policies.
In the implementation of ESG in Indonesia, ESG is introduced, among other things, as Sustainable Finance in the banking industry. Since the adoption of ESG, companies use these standards as considerations when making investment-related decisions. Conversely, investors also consider companies that apply ESG principles before injecting their funds.
In the context of infrastructure provision, the Ministry of Finance has various fiscal support schemes and instruments. This discussion focuses on Government Support for infrastructure financing through the Government-Business Entity Cooperation (KPBU) scheme.
In the past year, the Ministry of Finance reaffirmed its commitment to contribute to achieving Sustainable Development Goals (SDGs) through the launch of the ESG Framework and Manual, including its implementation in Government Support for KPBU infrastructure financing.
The ESG Framework and Manual serve as clear guidelines for all stakeholders on "who" does "what," especially in infrastructure projects with the KPBU scheme. The development of the ESG Framework and Manual began in early 2020 and is designed to be easily readable and usable by relevant stakeholders, including project owners (referred to as PJPK), investors, lenders, the Ministry of Finance as the regulator, and its Special Mission Vehicles (SMV) as extensions for providing Government Support.
The ESG Framework is developed to encourage the alignment of infrastructure performance indicators with sustainability goals. As a result, PJPK and private partners can monitor and acknowledge their contributions to the sustainable development agenda.
In line with the ESG Framework, the ESG Manual is prepared to provide guidance on the implementation of the ESG Framework to ensure that infrastructure provision has a positive economic impact. The ESG Manual also provides guidance to minimize negative impacts on environmental, social, and governance aspects.
Currently, publicly listed companies have learned a lot from implementing ESG and are applying it in more detail than before. This indicates a positive change in transparency and accountability of companies regarding ESG issues.
However, there are still some aspects to be considered in the implementation of ESG in Indonesia. One of them is the expansion of awareness and understanding of ESG, not only among large companies that have gone public but also among small and medium-sized enterprises.
Furthermore, the implementation of ESG should involve active participation from all stakeholders, including investors, the community, and the government, to maximize the achievement of sustainable development goals. (Nisa)