The term ESG (Environmental, Social, and Corporate Governance) is currently capturing the global community’s attention as a significant focal point. It has emerged as a subject of great interest among economists, investors, environmental advocates, and the wider public. It also has evolved into a pivotal consideration for investors, guiding their evaluations of a company’s sustainability risks. So, what precisely does ESG entail, and how is it being implemented within the Indonesian context? Below, we delve into a comprehensive explanation.
At its core, ESG (Environmental, Social, and Corporate Governance) represents a novel set of standards and investment practices adopted by businesses. This framework consists of three vital components: Environmental, Social, and Corporate Governance.
When a company integrates ESG principles into its business operations and investment strategies, it signifies a commitment to aligning its policies with the principles of environmental preservation, social responsibility, and effective governance, as reported by Cermati.
The application of the ESG (Environmental, Social, Corporate Governance) concept has spawned a range of terms, each conveying the same underlying essence. These terms encompass variations like Environmental, Social, and Corporate Governance (ESCG), Co-Shared Value (CSV), Responsible Business Conduct (RBC), and Impact Investing.
Business Directory: Unraveling ESG Elements
ESG encompasses a holistic concept that accentuates sustainable development, responsible investment, and business practices, encapsulating three pivotal dimensions: environmental, social, and governance.
Essentially, it dictates that every action and decision made by financial entities should be underpinned by the principles of environmental stewardship, social accountability, and sound governance. The Financial Services Authority (OJK) provides an insightful breakdown of these elements:
- Environment: This facet pertains to a company’s consideration of its operational impact on the environment and its role as a custodian of natural resources. Environmental factors encompass various aspects, such as eco-friendly energy usage, effective waste management to prevent pollution, active participation in the conservation of irreplaceable resources, humane treatment of animals, and the implementation of robust risk management systems to manage environmental risks.
- Social: This dimension delves into a company’s relationships and reputation within its stakeholder ecosystem. How a company engages with stakeholders, including communities, suppliers, consumers, employees, and relevant parties, holds paramount importance. Social considerations not only influence financial performance but also significantly contribute to a company’s overall image.
Key social aspects include:
- Selecting suppliers that adhere to ESG policies and practices.
- Engaging in community development through profit-sharing or voluntary employee contributions.
- Ensuring a safe and healthy working environment for employees.
- Incorporating stakeholder input and expectations into decision-making processes.
- Governance: This category pertains to a company’s adherence to principles of corporate governance in its self-regulation. Governance factors comprise:
- Employing accounting methods compliant with stipulated standards.
- Ensuring inclusivity in decision-making, allowing relevant stakeholders to participate in pivotal decisions.
- Guaranteeing no political contributions are made to secure special treatment.
- Ensuring no engagement in illicit activities.
Business Directory: ESG as a Driver of Profit and Community Empowerment
ESG has emerged as a pivotal strategy in the corporate landscape. Numerous companies are now evaluating their operations through it lens. The rising significance of ESG-based investments is validated by Anne Finucane, Vice Chairman of Bank of America. In 2015, Bank of America underwent a comprehensive evaluation of its performance, subsequently expanding into renewable energy businesses.
Adjustments were made to employee contracts, diversity promotion within the company was prioritized, and senior management roles were optimized. This comprehensive approach yielded a remarkable $16.5 billion in revenue that year. Additionally, the shift towards renewable energy led to a projected $13 trillion growth in the renewable energy sector within the financial services industry.
In essence, ESG presents a management paradigm that embraces environmental consciousness while adopting a holistic outlook. This positive approach, benefiting all stakeholders, can be implemented across diverse activities and entities. This extends beyond investors and companies to encompass community advocates, stakeholders, and policymakers who can adopt it as a guiding framework for their endeavors.
ESG in the Indonesian Landscape
Trubus Rahadiansyah, an Observer of Public Policy, expresses optimism about ESG’s implementation in Indonesia. According to Okezone, he emphasizes that government bodies, private entities, and even the Indonesian populace have swiftly embraced the tenets of it.
“The conscious application of ESG by companies in Indonesia goes beyond merely meeting market demands; it mirrors an understanding of the critical balance between economic goals, environmental preservation, and social well-being. The optimistic projections and the ever-widening adoption of its principles underscore companies’ commitment to sustainable growth and enhanced corporate social responsibility,” affirms Trubus in his research, Jakarta, Friday (8/25/2023).
Various sectors, including mining, often under scrutiny due to their extractive nature, have started embracing green mining practices and initiatives.
Simultaneously, the Capital City Authority (OIKN) has declared IKN as the pioneering city to establish an Environment, Social, and Governance (ESG) Committee in Indonesia.
As reported by Antara, Bambang Susantono, the Head of OIKN, highlights that the ESG Committee is a dedicated entity tasked with overseeing and promoting IKN’s development in alignment with the principles of sound environmental practices, social responsibility, and effective governance.
“I am pleased to share that I have signed the decree. Nusantara is the first city in Indonesia to establish an ESG Committee,” declared Bambang at the launch event of the ESG Indonesia Association in Jakarta on Monday.
During the same event, Rhenald Kasali, Chairman of the ESG Indonesia Association, underscores the significance of its principles for Indonesia. He emphasizes that Indonesia’s economic advancements can serve as a model for other nations to examine and draw inspiration from its practices in Indonesia. This is especially pertinent considering Indonesia’s role as a primary producer of commodities and renewable energy, playing a pivotal role in the global transition towards sustainable energy, replacing fossil fuels.
Therefore, the establishment of the ESG Indonesia Association and the ESG Research Center, in collaboration with OIKN and OJK, aims to mitigate environmental and social impacts in business operations while enhancing governance practices.
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