In Brief:
- Sustainable financing in Indonesia reached Rp913.15 trillion (US$56 billion) by end-2020, underscoring the commitment to sustainable practices in Indonesia’s financial sector.
- Companies with exemplary ESG performance can secure advantageous financing terms as investors frequently view these organisations as having lower financial risks, leading to reduced borrowing costs and improved access to capital.
- Indonesia’s sustainability financing landscape is evolving, with frameworks like POJK 51 and the Green Taxonomy facilitating access to funding for businesses that align with sustainable practices, fostering growth in ESG-driven investments.
Sustainability financing in Indonesia will reach over Rp913.15 trillion (US$56 billion) by the end of 2020. This figure demonstrates the growing commitment to sustainable practices in the Indonesian financial sector.
Strong ESG ratings can serve as a positive signal to investors, potentially leading to increased investment and improved access to financing opportunities. This aligns with the concept of signalling theory, where companies use ESG performance to communicate their commitment to sustainability and responsible practices, attracting investors seeking to align their portfolios with such values.
ESG ratings, which assess environmental, social, and governance risks, are crucial in decision-making. Companies with strong ESG ratings demonstrate better anticipation of risks as investors can identify and understand financially material ESG risks to a business.
While “good” is subjective and specific rating scales vary between providers, a general interpretation aligns with Refinitiv’s ESG score classifications.
According to their system:
Scores from 0 to 25 indicate poor ESG performance.
Scores from 26 to 50 suggest satisfactory performance.
Scores from 51 to 75 and above represent good to excellent performance, signifying above-average transparency and proactive engagement in ESG practices.
Several ESG indices exist, like the ones on the Indonesian Stock Exchange, which track companies demonstrating strong ESG commitments and provide investors with insights into their sustainability practices.
When a company showcase a strong ESG rating, it indicates company’s:
- Proactivity in managing environmental and social risks, making it more attractive for responsible investment opportunities.
- Transparency and quality of its ESG disclosures.
On the flipside, a low ESG rating can deter investment, as it may signal potential future liabilities or reputational risk. How? As Indonesia intensifies its climate action, businesses in high-carbon sectors must navigate stricter regulations and invest in sustainable practices. Access to funding is essential to support compliance and innovation in this evolving landscape.
Sustainable Practices, Strong Performance, Enhanced Access to Funding.
Companies with higher ESG ratings can attract more favourable financing terms, such as lower interest rates or better loan conditions, thereby improving their overall financial flexibility. Companies that excel in ESG metrics often experience less severe financing constraints, enabling them to pursue strategic investments more aggressively. Here are several ways how companies can enhance corporate performance with access to funding:
- Investor interest & ESG as a financial factor:
Investors are increasingly integrating ESG factors into their decision-making processes. They recognise that companies with strong ESG performance are better positioned to manage risks and capitalise on opportunities, leading to potentially higher and more stable returns. This translates into a wider pool of potential investors, more favourable borrowing conditions, and higher stock valuations, providing companies with the financial resources to invest in further ESG-focused investment products, such as exchange-traded funds (ETFs) and green bonds.
- Financial flexibility & sustainable growth:
High ESG ratings can enhance a company’s financial flexibility, its ability to adapt to changing market conditions, manage financial resources effectively, and access capital. This study shows that companies with greater financial flexibility are more likely to endure economic downturns and have the capacity to explore growth opportunities, potentially leading to increased financial performance.
- Shifting investment landscape:
Indonesia’s regulatory framework and the increasing importance of ESG reporting create favourable financial terms for companies with strong ESG performance. POJK 51 requires financial institutions and public companies to implement sustainable financing and prepare sustainability reports. Financial institutions are responding to POJK 51 by developing products and services that support green projects, aligning with the principles of sustainable financing. This opens new avenues for companies with strong ESG performance to access green financing options.
Green Taxonomy facilitates access to funding for sustainable initiatives.
Indonesia’s Green Taxonomy, officially launched in 2022 by the Financial Services Authority (OJK), is a critical framework aimed at classifying economic activities that contribute to sustainable development. This taxonomy aims to standardise definitions and criteria for green investments. As a result, businesses classified under green categories may benefit from lower interest rates or preferential financing terms.
Though in early stages, Green Taxonomy enables investors, particularly those focused on sustainability, to prioritise companies that align with its criteria. There is scope for further development of POJK 51 to address the evolving sustainability landscape and strengthen its impact. This could include refining reporting guidelines, expanding the scope of mandatory disclosures, and incorporating incentives for companies to go beyond compliance and strive for leadership in ESG performance.
How can your company enhance its ESG performance and secure the necessary capital for a sustainable future?
Renoir CGI works with organisations to optimise value creation through ESG factors and considerations, and it can be broken into six practical steps:
- Identify a company’s material ESG topics that must be managed from a risk and opportunity perspective.
- Conduct a gap analysis that examines current sustainability practices (such as material policies, programs and initiatives) and assess them against relevant and sector-specific global sustainability standards and frameworks.
- Prepare an ESG strategy and roadmap for the overall plans, objectives and milestones by aligning stakeholders’ sustainability vision and corporate strategy.
- Helps company create net-zero strategy and spotlights the adoption of net-zero policies by Indonesian businesses such as identify a comprehensive emissions reduction strategy and net zero science-based targets.
- Handhold company to implement the ESG transformation effectively.
- Ensure comprehensive disclosures and aligning with relevant standards to obtain ESG rating from any of Indonesia’s four ESG indices on the IDX (developed in partnership between IDX and KEHATI and Sustainalytics). ESG rating offers investors a range of options for evaluating companies’ sustainability performance.
You noticed that your company’s ESG reporting lacks consistency and transparency, impacting your ESG rating. What to do next?
