As the COVID-19 pandemic fallout, the year 2020 has been marked as a turning point in environment, social, and governance (ESG) investing due to the ongoing global challenges. Due to the higher tension of climate change issues and the current socio-political environment, more businesses are encouraged to embrace commitments to the ESG framework. Not only the focus on the environmental impact, concerns around the ‘S’ or social issues; such as employee health and safety, compensation package for layoffs, and diversity policy are also expected to be disclosed by companies.
While the global concerns on ESG have accelerated and will remain so, companies are encouraged to incorporate ESG into their business model in order to compete in the market and attract investors. According to the Ernst & Young report (2020), the percentage of investors using non-financial performance in investment decision-making has jumped from 27% in 2016 to 43% in 2020, making the ESG metrics disclosure more important to gain investors.
Sustainability report is a medium for companies to communicate their commitment and progress, as well as forward plans on the initiatives. It also demonstrates how the company influences and is influenced by ESG matters, emphasizing a link between non-financial and financial performance. The report also shows what the company does to manage ESG risks and opportunities, indicating to the public if the company has competitiveness in the era of sustainability. Simply put, the practice of disclosing the information through sustainability reporting is inline with stakeholders’ demand for transparency and accountability.
Other than that, being transparent is critical to capture companies’ commitment and progress to ESG issues. A company can build credibility and a positive profile in the eyes of the public through its seriousness about tackling such issues. As a result, it helps build the company brand, enhance the company’s reputation, and maintain stakeholder’s trust. An outstanding performance in ESG enables a company to gain a strategic positioning and competitiveness in the industry.
The importance of sustainability reporting can also be looked at internally. Sustainability reporting matters as it provides opportunities for companies to define and understand which sustainability issues are aligned with the business context and strategy, and where goals create financially material business value. The analysis in creating a proper sustainability report also helps discover which operations and practices need improvement, such as green productivity, risk management, green products, or business cost.
As sustainability reporting may cover very broad issues, it is necessary for companies to recognize their own sustainability context and the stakeholders’ concerns. Thus, the process that involves stakeholder engagement is a valuable tool to get feedbacks and learn from the stakeholders before writing a sustainability report. In practice, it also provides opportunities to include stakeholders in shaping and re-shaping the value of the company. Once the company starts communicating its performance and goals, the company is expected to commit and take action to constantly improve performance in the next reporting.
With that in mind, no wonder why sustainability reporting becomes a global trend. It indicates that financial performance solely should not be a company’s important goal. Businesses are also expected to be responsible for the impact of their action on its employees, community members, and the environment.
In Indonesia, the government shows supports for the trend. The national regulations in ESG reporting can be traced back to 2006. The government introduced the Regulation of Bapepam-LK No. X.K.6 that requires companies to disclose their social responsibility initiatives in their annual reports. Even though the “social responsibility initiatives” in X.K.6 most likely refer to the community development programs or the social and environmental projects, the regulation has put the groundwork for corporate accountability and transparency in non-financial reporting in Indonesia.
Further, Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK) issued the Regulation No. 51/POJK/03/2017 concerning the Sustainable Finance. It mandated Financial Services Providers, Issuers, and Public Companies to submit a sustainability report to OJK. In addition, financial entities are required to implement sustainable finance, aiming for sustainable economic growth in line with the economy, social, and environmental interests.
With more investors, clients, customers, government, and public at large taking ESG performance into consideration to value companies, businesses are pressured to create sustainability reports or improve their standards of reporting for already-reporting companies. Sustainability report is not a “nice-to-have”, but rather should be a part of companies’ core business strategy and key management practices in Indonesia.
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Dr. Semerdanta Pusaka – Country Director for SR Asia Indonesia
Nabila Khoiru Nisa – Programs & Communications Officer for SR Asia Indonesia