The More, The Merrier: What Increased ESG Standards Mean To Indonesia’s Energy Transition In Mining Industry

In Brief

Presidential Regulation 60/2023 on the National Strategy of Business and Human Rights (PR 60/2023) embeds human rights and ESG principles into Indonesia’s energy transition, including in high-risk mining. Higher ESG standards bring real benefits for compliant companies, but gaps remain between PR 60/2023 and the UN Guiding Principles on Business and Human Rights, particularly on due diligence, remediation and transparency.

Key Takeaways

PR 60/2023 establishes the National Strategy for Business and Human Rights (NSBHR), covering state duties to protect, business responsibility to respect, and access to remedy.
The regulation creates national and regional Business and Human Rights (BHR) task forces to coordinate, monitor and evaluate implementation.
PT Merdeka Copper Gold Tbk achieved an MSCI ESG rating of A in 2023, the only Indonesian mining company in its category to do so.
According to PwC, top mining companies with higher ESG ratings saw a 15% increase in net profit and market capitalisation rising to US$1.46 trillion.
Gaps remain between PR 60/2023 and the UN Guiding Principles: ongoing human rights due diligence, clear remediation pathways and detailed reporting requirements.

PR 60/2023 and the National Strategy on Business and Human Rights

The imperative for a sustainable transition to renewable energy sources has never been more pressing in Indonesia’s evolving energy landscape. Inherently intertwined with Environmental, Social, and Governance (ESG) principles, this transition requires a robust legal and regulatory framework to ensure its success.

The recent issuance of Presidential Regulation Number 60 of 2023 on the National Strategy of Business and Human Rights (PR 60/2023) aims to further promote, protect and respect human rights in business activities. The regulation includes establishing obligations of related ministries, institutions and regional governments to protect human rights in business activities; the responsibility of business actors to respect human rights; access to redress for victims of alleged human rights violations in business activities; special funds for implementing the National Strategy; and establishing a task force for human rights due diligence. Attached to the regulation are guidelines for institutions to carry out planning, implementation and monitoring of business and human rights, and guidelines for business actors and other stakeholders to increase respect for human rights.

The regulation marks a significant step towards integrating business and human rights, including ESG principles, into the nation’s energy policies. The question remains: to what extent does Indonesia’s current legal framework support ESG compliance, particularly in high-risk sectors such as mining?

ESG regulations and the mining industry in Indonesia

ESG principles have become increasingly significant in the mining sector globally, with Indonesia being no exception. Given the sector’s substantial impact on the economy and the environment, aligning the mining industry with ESG standards is crucial.

Impact of PR 60/2023

The National Strategy for Business and Human Rights (NSBHR), regulated through PR 60/2023, aims to showcase Indonesia’s human rights and ESG compliance commitment. Its main purpose is to establish that business operators must respect human rights in conducting their commercial activities. As the main reference directing national policy, the NSBHR contains strategies and steps to be used as a reference by ministries, institutions, local governments, business actors and other stakeholders for the advancement of the business world, considering the protection, respect and remediation of human rights.

PR 60/2023 focuses on achieving sustainable development, enhancing economic efficiency and protecting human rights within Indonesia’s business sector. Its critical impacts on businesses include:

Legal framework for human rights in business. The regulation outlines an NSBHR that directs ministries, government agencies, regional governments, businesses and other stakeholders to integrate human rights into their operations. This integration ensures that economic development through industrial and business activities is balanced with the need to respect and protect human rights, aligning with global sustainability and ethical standards.
Economic growth and ESG standards. By mandating business entities to respect and rehabilitate human rights, the regulation ensures that Indonesia’s rapid economic and energy transition does not compromise ESG standards. This is critical as businesses significantly influence environmental impact and social welfare. The regulation likely encourages businesses to adopt sustainable practices, invest in clean energy and improve social welfare, making Indonesian businesses more attractive globally, especially in markets where ESG compliance is valued.
Enhanced corporate responsibility and accountability. Businesses must implement human rights due diligence processes to identify, prevent, mitigate and account for how they address their impacts on human rights. This includes providing remediation for any human rights abuses they cause or to which they contribute. The regulation promotes transparency and accountability, enhancing stakeholders’ trust and potentially leading to better investment and financing conditions for compliant companies.
Strengthened institutional framework. Creating national (National BHR) and regional (Regional BHR) task forces to oversee and implement the strategy ensures that the human rights in business agenda is uniformly applied across different regions and sectors. These task forces coordinate, monitor and evaluate the implementation of human rights standards in business operations, ensuring that the policies are effectively enforced and adapted as needed.

Incentives for businesses that adhere to ESG standards

Several mining companies have emerged as frontrunners in ESG integration, setting benchmarks for the industry. These companies have successfully navigated the challenges of incorporating ESG principles into their operations, demonstrating that sustainability and profitability can go hand in hand.

One notable example: in 2023, PT Merdeka Copper Gold Tbk achieved an A rating from MSCI ESG, becoming the only Indonesian mining company in the MSCI Diversified Metals and Mining category to receive such a rating. Recognition of this ESG rating by a prestigious global institution like MSCI undoubtedly enhances the company’s international reputation.

Implementing ESG can provide external benefits, such as significantly reducing carbon emissions, and tangible financial advantages. According to PwC’s 18th Annual Review, the top 40 mining companies with higher ESG ratings saw a 15% increase in net profit, a 40% increase in cash on hand, and a nearly two-thirds rise in market capitalisation to US$1.46 trillion. The survey also revealed that coal production by these top 40 mining companies dropped by 12% in 2020. Transactions decreased from five in 2018 to none in 2019 and 2020, highlighting the ongoing shift in this sector towards achieving net zero emissions.

Internally, ESG implementation also provides benefits, including enhancing company performance, identifying risks and business innovations, improving company reputation, seizing business opportunities, enhancing management quality through transparency, maintaining long-term business sustainability and supporting financial performance. Furthermore, mining companies with higher ESG ratings outperformed the broader market during the peak of the COVID-19 crisis, delivering an average total shareholder return of 34% over the past three years — ten percentage points higher than the general market index.

Aligning investment policies with ESG standards

The transition towards renewable energy and integrating ESG principles into investment policies represents a paradigm shift in evaluating and executing investments. This section examines the interplay between international ESG standards and Indonesian policy, alongside the inherent challenges and opportunities for investors within the renewable energy and mining sectors.

The role of international standards in shaping policy

International ESG standards and frameworks are pivotal in shaping national policies, especially for countries like Indonesia, which are transitioning towards renewable energy. These standards serve as benchmarks for sustainable and socially responsible investments, guiding policymakers in developing regulations that promote environmental stewardship, social welfare and sound governance.

The establishment of PR 60/2023 was also inspired by the international guidelines in the document titled “Guiding Principles on Business and Human Rights: Implementing the UN Protect, Respect and Remedy Framework”. This document later received endorsement from the UN Human Rights Council through Resolution A/HRC/RES/17/4, which the Secretary-General’s Special Representative presented on the issue of human rights and transnational corporations and other business enterprises. This instrument encompasses three important pillars. The first pillar is that the state is obliged to protect human rights. The second pillar is that business actors have the responsibility to respect human rights. The third pillar is that victims of human rights violations have the right to access effective, legal, accessible, certain, fair, transparent and accountable remedies, both through judicial and non-judicial mechanisms.

For Indonesia, aligning investment policies with ESG standards means incorporating guidelines and practices recognised globally, such as the Principles for Responsible Investment (PRI). These benchmarks provide a template for crafting policies that attract sustainable investments and ensure that these investments contribute positively to the country’s environmental and social objectives.

PRI outlines six key commitments: integrating ESG issues into investment analysis and decision-making, engaging in active ownership, seeking ESG disclosures from investees, promoting the industry’s principles, collaborating to improve implementation effectiveness, and reporting progress. Investors following the PRI principles are expected to report their ESG activities and impact.

Human rights principles are also highlighted by the United Nations Guiding Principles as a guideline. PR 60/2023 already highlights the importance of reporting, monitoring and evaluation to ensure the implementation of all actions and the achievement of the objectives of the NSBHR. Additionally, an appendix in PR 60/2023 includes a Matrix for Business and Human Rights Action. However, several potential gaps between PR 60/2023 and the United Nations Guiding Principles need to be considered.

First, human rights due diligence. Under the United Nations Guiding Principles, businesses are required to have mechanisms in place to identify, prevent, mitigate and account for how they address their impacts on human rights, but PR 60/2023 lacks explicit requirements for ongoing human rights due diligence processes.

Second, remediation. According to the United Nations Guiding Principles, businesses should not only prevent and mitigate human rights risks but also remediate any adverse human rights impacts they cause or to which they contribute. A gap might exist if PR 60/2023 does not include clear pathways for remediation for those impacted by business operations.

Third, transparency and reporting. PR 60/2023 does not require detailed reporting on human rights practices and impacts, so it would not align well with the UN principles’ demands for transparency. These three concerns are things the Indonesian government needs to pay attention to in regulating the collaboration between business and human rights.

FAQ

What is PR 60/2023?

Presidential Regulation Number 60 of 2023 on the National Strategy of Business and Human Rights (NSBHR). It sets out state duties to protect human rights in business, business responsibility to respect human rights, and access to remedy for victims.

What ESG benefits do mining companies gain?

Externally, ESG compliance can improve reputation, attract investment and reduce emissions. PwC data shows higher-rated miners enjoyed stronger profits, cash and market capitalisation. Internally, ESG supports performance, risk identification, reputation and long-term sustainability.

What are the six PRI commitments?

Integrating ESG into investment analysis and decision-making, active ownership, seeking ESG disclosures from investees, promoting the principles, collaborating to improve implementation, and reporting on progress.

Where does PR 60/2023 fall short of the UN Guiding Principles?

Three gaps: no explicit requirement for ongoing human rights due diligence, no clear remediation pathways, and no detailed reporting requirements on human rights practices and impacts.

Conclusion

PR 60/2023 aims to create a balanced approach to Indonesia’s rapid energy transition by embedding higher ESG standards into the core of business operations. This fosters a more sustainable and responsible business environment and positions Indonesia favourably in the global economy, adhering to international human rights and environmental standards. ESG compliance within the mining sector is especially pivotal for a sustainable and responsible energy transition. It supports environmental sustainability by minimising ecological damage, promoting the efficient use of resources and enhancing social welfare through better labour practices and community engagement. Improved governance quality, including transparency and accountability, further strengthens the sector’s compliance with international standards and builds investor confidence. PR 60/2023 is a reasonable effort for Indonesia to balance economic growth with environmental protection and social responsibility, thereby supporting broader national and global sustainability goals.

Originally published in ACTIO E-Magazine Edition 24 (July 2024). Law as of July 2024.

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