The U.S is withdrawing from the Just Energy Transition Partnership, a collaboration between richer nations to help developing countries transition from fossil fuels such as coal to renewable and cleaner energy. Indonesia, along with South Africa and Vietnam will be the impacted parties. As the JETP program is inherently intertwined with the Environmental, Social and Governance (ESG) drive, this campaign also is virtually dead in the U.S.
Trump's policies have favored deregulation and traditional energy industries, undermining the progress made in ESG initiatives. During his first term, over 100 environmental regulations were rolled back, and federal agencies issued guidance discouraging ESG-based decision-making in retirement plans. This approach reflects a broader criticism of ESG principles and practices as hindrances to economic growth.
But despite these challenges, ESG-focused funds continued to thrive globally , driven by consumer and investor demand. Indeed, the rise of sustainable finance has attracted more investors, who are often willing to pay extra for sustainable-related products. McKinsey's report in 2023 stated that 40 percent of U.S investors were interested in buying sustainable-linked products.
In contrast to the U.S, the European Union has been a global leader in sustainability efforts. Despite strong opposition around the world, the EU Deforestation-free Regulation (EUDR), which aims to minimize deforestation and forest degradation associated with agricultural raw materials, has not been cancelled but only delayed until December 2025 for large operators and traders. The Carbon Border Adjustment Mechanism (CBAM) is another significant regulation in the EU's sustainability framework. CBAM aims to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU. However, the latest Omnibus regulations at the end of February put relaxation on the mechanism and now only applies for above 50 ton carbon thresholds.
Asia presents a diverse and evolving picture. Countries in Asia have shown varying levels of commitment to ESG principles. For instance, Japan has been proactive in promoting ESG practices, with the Tokyo Stock Exchange requiring listed companies to disclose their ESG initiatives. Similarly, South Korea has made significant strides in integrating ESG into corporate governance. From China to the United Arab Emirates to Brazil, companies are finding that mere pledges to go green and be socially responsible and transparent are not enough.
Indonesia has also made significant strides in promoting ESG practices through regulatory frameworks and initiatives. The imperative for a sustainable transition to renewable energy sources has never been more pressing in Indonesia’s evolving energy landscape. Inherently intertwined with ESG principles, this transition requires a robust legal and regulatory framework to ensure its success.
The recent issuance of Presidential Regulation Number 60 of 2023 on National Strategy of Business and Human Rights (PR 60/2023), to further promote, protect, and respect human rights in business activities. The regulation marks a significant step towards integrating business and human rights, including ESG principles into thenation’s energy policies. Nevertheless, the question remains: To what extent does Indonesia’s current legal framework support ESG compliance, particularly in high-risk sectors such as mining?
The Indonesian Financial Services Authority (OJK) has been at the forefront, leading efforts around sustainable finance and green bonds. The OJK's Sustainable Finance Roadmap Phase II (2021-2025) aims to identify and incorporate ESG risks into financial practices. Additionally, we were involved in the Green Taxonomy exercise by OJK that classifies economic activities to guide industries and investors towards a green transformation.
OJK Regulation No 51mandates all financial institutions in Indonesia, includingpension funds, to integrate ESG factors into their risk management and business processes to promote sustainable finance practices, making ESG consideration as one of the core components of financial decision- making. Financial institutions are obliged to develop and implement a Financial Sustainability Action Plan (RAKB) and submit this plan to the OJK.
While it is not mandatory, the regulation encourages alignment with international standards such as the UN Principles for Responsible Investment (PRI) and sustainable development goals to improve sustainability efforts and corporate governance.
Indonesian companies are increasingly committing to net-zero targets and integrating ESG metrics into their business strategies. This shift is driven by investor priorities, market opportunities, and evolving regulations. Companies that adopt robust ESG practices can attract investors, expand their market, and enhance their brand reputation.
Despite progress, Indonesia faces challenges in implementing ESG practices, including corruption, GHG emissions, and external food dependency. The last one is the main trigger of the current government’s plans to prioritize food and energy self-sufficiency as part of Indonesia's national development strategy. This includes utilizing more land resources, which may involve opening forested areas for agricultural and energy projects.
The President has emphasized the importance of achieving food and energy independence to ensure national sovereignty and the well-being of the population. However, this approach has raised concerns among environmentalists about the potential impact on Indonesia's forests and biodiversity.
For example, the food and energy resilience project in Papua has been feared to cause significant deforestation. The overall plan involves clearing up to 2 million hectares of forested, wetland, and grassland areas in the Merauke district. This large-scale project has raised concerns among environmentalists and indigenous communities about the impact on biodiversity and traditional lands
Indonesian companies commonly use, the Global Reporting Initiative (GRI) Standards, which represent a comprehensive framework for sustainability reporting, encompassing economic, environmental and social dimensionsto disclose their sustainability performance and effects.
Despite the uphill challenges in enforcing the ESG principles in business practices Indonesia should consistently demonstrate strong commitment to implementingESG in policy making and gradually enforce mandatory ESG reporting for financial companies and enterprises operating in the natural resource sector. Positive international perception of Indonesian commitment to fulfil the ESG principles is crucial to helpDanantara, our newsovereign wealth fund,to attract long-term and bonafide investors.
