Welcoming the Financial Services Authority’s Regulation on Sustainable Finance (POJK)

By Jalal

Sustainable Finance Advisor

Transformation for Justice in Indonesia

This article was also published in Tempo

After waiting anxiously since early 2015, we can finally see the birth of a regulation on sustainable finance in Indonesia.  On July 20, 2017, the last day of the 2012-2017 office term of the Financial Services Authority’s (Otoritas Jasa Keuangan – OJK) Board of Commissioners, Indonesia received a delightful present in the form of the OJK Regulation (POJK) 51/POJK.03/2017 on the Application of Sustainable Finance for Financial Services Institutions (FIs), Issuer Companies and Public Companies.

In fact, after it was signed, we did not immediately have access to the regulation, as first it had to be registered at the Ministry of Law and Human Rights, in order to get a number and to be legally promulgated. Thus, anyone intending to know its detailed contents, still had to wait a little longer. However, on August 8, 2017, the contents of this regulation could finally be seen.

Four Considerations

What were the considerations of the OJK in issuing this regulation? There were four. The first one was, is “that in order to achieve sustainable development that is capable of maintaining economic stability and that is also inclusive in nature, it is necessary to have a national economic system that promotes harmony between economic, social, and environmental aspects.” Thus, there is awareness from the OJK that in order to achieve sustainable, stable and inclusive development, there is no other way than by harmonizing economic, social and environmental aspects. If that doesn’t happen, imbalance between these three aspects will result in unsustainability, instability and exclusion.

The second one was, “that to drive a national economy that promotes harmony among economic, social, and environmental aspects, while maintaining economic stability and while being  inclusive, adequate funding is required.” This point is very important, considering that financial resources are fundamental to achieve a sustainable, stable and inclusive economy. Therefore, these resources must be available in sufficient amount. Otherwise, the objective of achieving such economy will not be achieved, or may be achieved within a longer period than desired or planned for.

The third consideration was, “that the development of an environmental-friendly financial system has been mandated in Law Number 32 from year 2009, on Environmental Protection and Management.” In the POJK, the OJK states that the mandate for sustainable finance actually does not only originate from the need for the creation of a sustainable, stable and inclusive economy, but also from the need for environmental protection and management, as mandated in Law 32/2009. Therefore, it can be interpreted that sustainable finance is the finance compatible to the entire objective of environmental protection and management set forth in the relevant law.

The last consideration was, “that the Sustainable Finance Roadmap in Indonesia, issued by the Financial Services Authority (OJK), needs to be followed up with a regulation that is specific and binding to all financial services institutions, issuer companies, and public companies.”  Thus, this POJK actually is inseparable from the substance of the Sustainable Finance Roadmap, issued at the end of 2014. This also means that the targets stated in the Roadmap – along with the time frame – also become a reference for the POJK.

Fourteen Articles

Article 1 explains the considerations and regulations that were used as references and contains various definitions. The most important one, of course, is the definition of sustainable finance itself, stated as “…the comprehensive support from the financial services sector to create sustainable economic growth by harmonizing economic, social, and environmental interests.”

Comprehensive, of course, does not mean partial. It means that the financial services sector shall not act half-heartedly – such as by only performing greenwashing – in supporting sustainable development. It also means that it applies to all financial services institutions, and not only to some of the banks or insurance companies. In addition to the definition of sustainable finance, there are 12 other definitions in this article.

Article 2 sets out the obligation to apply sustainable finance to all the parties mentioned in this regulation, namely financial services institutions, issuer companies and public companies. The definitions of each of the parties is given in the previous article. From this, it can be understood that this POJK is actually not only applicable to Financial Institutions, as is often the public perception.

This article also contains the principles of sustainable finance, eight of which are mentioned, namely: the principle of responsible investment; the principle of sustainable business strategy and practice; th principle of social and environmental risk management principle; the principle of governance; the  principle of informative communication; the principle of inclusiveness; the principle of priority sector development; and the principle of coordination and collaboration. What is meant by these principles can be read in the Explanatory notes. However, as a rule, all the aforementioned principles must be upheld. Violation of any of the principles is likely to result in failure to establish sustainable finance.

Article 3 explains that this POJK shall be applied progressively. Commercial banks included in the category of “Commercial Bank by Business Activities” (Bank Umum berdasarkan Kegiatan Usaha – BUKU 3 and BUKU 4, as well as foreign banks, are the first ones that must comply, starting January 1, 2019. Meanwhile, pension funds with a minimum of total assets worth IRD 1 trillion, are the last ones that have to comply, namely as of January 1, 2025.

The obligation to prepare a Sustainable Finance Action Plan (RAKB) is stated in Article 4. Meanwhile, the contents that the RAKB should cover is laid out in Attachment 1 to the POJK. Article 5 states that the RAKB is mandatory; and Article 6 states the obligation to communicate the RAKB to the shareholders and to all organizational levels of the Financial Institution.

Article 7 still discusses the RAKB, which must be prepared based on the FI’s priorities, covering at least the development of sustainable finance products and services; internal capacity development, as well as organizational adjustments, risk management, governance and standard operating procedures that are consistent with the principles of sustainable finance. The RAKB shall also contain a time line for the implementation of the topics it covers.

The relationship between sustainable finance and corporate social and environmental responsibility (CSER), is mentioned in Article 8. For the FIs that are required to implement CSER – namely the FIs that  have the legal status of a limited liability company – their CSER financial resources must be partially allocated to support the implementation of sustainable finance. Meanwhile, the issuer companies and public companies that are not considered FIs but that are equally required to implement CSER may (but are not required to) allocate resources for this purpose. The allocation itself must be planned for in the RAKB, and the implementation must be reported on in the sustainability report.

Article 9 sets out the incentives by the OJK for those applying sustainable finance effectively. The incentives shall be in the form of support for capacity building, awards, and other incentives not yet defined.

Article 10 regulates the sustainability report already mentioned in Article 8. The Sustainability Report is mandatory, it can be prepared separately or as part of the annual report, and it must be submitted to the OJK, by the established submission deadline for each reporting period as. The mandated format for the sustainability report is provided in Attachment 2 to the POJK.

Article 11 provides for the submission of RAKB to the OJK, while Article 12 explains about the obligation to publish the sustainability report. Article 13 provides for sanctions, all of which are administrative in nature in the form of reprimands or written warnings. Article 14 states that this POJK shall come into force as from the date of its promulgation, namely July 27, 2017.

Be Grateful, Joyful, Proud

In general, there are not many countries in this world that have a regulation on sustainable finance. Therefore, Indonesia is a front runner compared to other nations. This needs to be happily welcomed. The awareness that Indonesian economy needs to become sustainable, stable and inclusive is another reason for being joyful.

However, of course, this regulation still contains room for improvement. This is understandable since it is among the first regulations being drawn up. We do not have sufficiently comprehensive references. This provides an opportunity to make improvements in the future.

One of the most obvious topics with room for improvement is regarding the policies that should be created by FIs, issuer companies, and public companies, to apply the relevant principles of sustainable finance. Since this is not explicitly mentioned in the POJK, it is necessary for qualified parties to help with the interpretation. Considering that sustainable finance is not yet a well understood concept for many parties, let alone has it become mainstream, we need to learn together about sustainable finance, while implementing it.

The next topic with room for improvement, which is very important, is about sanctions. If we are aware of the need to create a sustainable, stable and inclusive economy, and that it can only be achieved through sustainable finance, then violating this principle needs to be answered with strict sanctions. Why? Because violation puts the development of Indonesia in danger.

However, first we need to be grateful for the emergence of this regulation as it shows that Indonesia has started thinking towards the right direction regarding its finance and economy. We need to be joyful and at the same time proud of this. Helping with the interpretation, supporting the enforcement, and identifying and filling in the gaps are our subsequent duties.

 

 

 

 

 

 

 

This post is also available in: Indonesian

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