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Indonesian banks' first ESG reports suggest need for more guidance, data quality

As Indonesia's nonbank financial institutions, publicly listed companies and smaller commercial banks prepare to file their first mandatory sustainability reports next year, the industry is urging the regulator to provide more guidance and incentives.

The nation's largest commercial banks with a core capital of at least 5 trillion rupiah and foreign lenders have submitted their first environmental, social and governance reports to the Otoritas Jasa Keuangan, or Financial Services Authority, for 2019 in the first phase of the new policy. By 2025-end, all financial institutions and listed companies will be required to file their ESG reports on an annual basis.

Industry experts said, based on the reports submitted so far, the regulator should offer more technical guidance on data collection and reporting framework to improve the quality of ESG data and the outcome of the initiative.

"The Financial Services Authority never provided ESG metrics or [key performance indicators] to banks," said Achmad Deni Daruri, founder of Bumi Global Karbon, an Indonesian research and consulting firm that focuses on ESG. "As a result, there is no incentive for the banking industry to manage its ESG initiatives properly or report it openly and transparently in their sustainability reports. Currently, banks are only working on their ESG performance based on their own will."

According to BGK, among the 15 Indonesian banks that submitted sustainability reports, about 24% of their ESG parameters are in line with global standards, such as the Global Reporting Initiative, as well as practices acceptable to the London Stock Exchange and the Nasdaq Helsinki.

Emphasis on governance

Zooming into the three buckets within ESG, the Indonesian banks put more emphasis on governance disclosure, such as risk management, and less on environmental and social aspects, the research company said.

"Based on our anecdotal experience of engagement with some banks, it is clear that they are still learning to understand about ESG and sustainable finance principles," Lany Harijanti, Global Reporting Initiative's Indonesia program manager said.

BGK believes banks will likely shift more toward environmental aspects in the next reports as the Financial Services Authority requires more disclosures on items such as greenhouse gas emissions. The social aspect will likely gain some interest especially when it is related to health and work safety, mimicking the global trend.

Bank Central Asia, Indonesia's third-largest bank in terms of assets, said that the new regulation has helped guide the company in implementing its ESG strategy and that it supports the initiative.

"The implementation of ESG and sustainable finance needs to be done hand-in-hand with the whole firm," said Hera F. Haryn, executive vice president for secretariat and corporate communication at the lender. "We realize that sustainable finance needs a lot of adjustments and support from various parties. Because of that, BCA's first step is to obey the regulations, implement the values and cautionary principles and continue to educate other parties."

Other major banks, such as PT Bank Rakyat Indonesia (Persero) Tbk, PT Bank Mandiri (Persero) Tbk and PT Bank Negara Indonesia (Persero) Tbk, did not respond to requests for comments.

Incentives needed

Experts believe that sweeteners, such as tax incentives or an increase in ratings by the authorities, can encourage better ESG reporting and performance.

"Change in ESG among Indonesian banks will happen when the monetary authorities in Indonesia start mandating ESG disclosure and performance improvement by creating ESG regulations that are based on punishment and reward," Daruri said.

Daruri added that the regulator has done little to monitor banks' ESG disclosure during the coronavirus pandemic.

"The pandemic should push regulators to quickly implement tax incentives," he said. "Since the banks are making less profit, ESG is becoming another method to assess banks, instead of purely from an income standpoint."

Experts also noted that the impact of the pandemic on banks' ESG reporting will be evident in their 2020 sustainability reports, due in 2021.

Even so, experts are hopeful that ESG disclosure and, subsequently, action will continue to move toward the right direction as reporting becomes more standardized.

"Nonfinancial or ESG reporting is new for many small banks, even for some of the bigger banks, so the regulation has provided the learning curve in the right direction for sustainable finance," Harijanti said. "For the first time reporters, sustainability reporting is challenging the house has to be put in order since the guest will visit so to speak."

As of Oct. 9, US$1 was equivalent to 14,665 Indonesian rupiah.