Public Affairs Experts Talk – Social and Political Impacts to Business during Political Years:
Moving from Challenges to Opportunities – Jakarta, July 11 2018
Co-founder – A+ CSR Indonesia
Chairperson of Advisory Board – Social Investment Indonesia
The Rise of CSR and SDG Issues in Indonesia
CSR in Indonesia began to grow as the practice of multinational corporations, especially in the extractive industry sector, in the mid to late 1990s. Other industrial sectors, especially labor-intensive ones, such as the aparel industry also follow suit.
In that period, some companies still interpreted CSR in a narrow sense, i.e. community development. In fact, the majority of companies equate CSR with corporate donations. In certain sectors, for example, forestry, there is already a sustainable forest management initiative that brings together economic, social and environmental aspects – or what is known as the triple bottom line: profit, people, and planet.
Triple Bottom Line, although a concept from 1994, was only accepted by progressive companies in Indonesia about 1 decade later. But most companies have not shifted their understanding of CSR equations to corporate donations—even now. This may be related to stakeholder expectations of CSR. Most government agencies in Indonesia continue to expect corporate donations as a way to patch up the lack of financial resources for development. Others, those who lack integrity, instead see corporate donations as a way to earn illegal income.
Some communities in many places also do the same. There are still many community members who want a mere corporate donation, not demanding the company fulfill its responsibility to properly manage the economic, social and environmental impacts. This opens opportunities for the elite of the community who usually get a larger ‘quota’ from companies that want the community not to disrupt the smooth operation.
However, we are actually also seeing better developments. Among others, due to the realization that the company’s sustainability is actually related to the sustainability of Indonesia and the world. Sustainabale Development Goals (SDGs) emphasizes the importance of partnerships between governments, corporations and communities to achieve them, and this makes those who use SDGs platform become more aware of the real meaning of sustainability—therefore not just asking for corporate donations.
The Indonesian government has spawned a Presidential Regulation on SDGs in mid-2017, and has just completed the National Action Plan (RAN). This will be followed by the creation of a Regional Action Plan (RAD). On the other hand, the Government of Indonesia is also preparing the National Medium-Term Development Plan (RPJMN) 2020-2024, which would otherwise be closely linked to the SDGs. At the same time, the Government also requires the creation of a Medium Term Development Plan (RPJMD), which will be made by newly elected regional heads, to be based on Strategic Environmental Assessment (KLHS) in addition to the RAD SDGs.
Then, how is the company’s role in this SDGs? Although there are reports that the company is again considered a mere source of donation by several central and local government agencies, its role is actually broader and clearer. First, companies need to make sure their core business is aligned with SDGs-which means the net effect is to help achieve SDGs, not to blow them away. Second, the company’s social investment needs to ensure its beneficiaries to achieve prosperity, independence and sustainability. Third, companies that have a sustainability track record are also expected to advocate for policies that are consistent with the objectives of sustainability.
Addressing Pressures during the Elections
The relationship between the company and the government is always problematic. On the one hand there is a necessity to establish good relationships because the government is one of the main stakeholders, but on the other hand the relationship is often confronted with issues such as violations of business ethics and corruption. Business and anti-corruption ethics have long been an important part of CSR, and the challenge for companies that want to uphold social responsibility is very much found in Indonesia because various forms of violations are still common here.
Both general elections and local elections have their own challenges. Many of the contestants want financial resources from companies to be used for their political expenses. Those who can do the pressure are mostly the incumbents who still have a chance to be reelected. They have effective political power, so they can exert influence on companies, for example through the licensing process.
On the other hand, many companies feel that they have to invest in prospective political leaders who will be able to bring benefits to them later—through regulations designed to benefit political financiers, the creation of special projects designed to pay off political debt, or a ‘very simplified’ permitting process. Political support of such companies is then designed to make the candidate head of government to be indebted, a phenomenon called as state capture. This is mainly done by companies that do not have good governance, poor social and environmental performances, as well as those who are in controversial sectors.
There are many studies that prove that the worse the environmental, social, and governance performance the greater the donation given by the company, and the more prominent the communication. This is deliberately done to cover up the poor performance of the past, in addition to buying the ease of escaping from the examination in the future. Meanwhile, companies with good performance tend to perform CSR in accordance with their core business, bringing benefits to stakeholders and companies, but limiting direct donations.
Although in the past standards of sustainability have not seen too much of corporate political activity as an essential part of sustainability, attention to corporate political activity has become stronger lately. It seems that strengthening attention to environmental, social, and governance (ESG) performance over the past five years has made even more attention to this aspect of G. Of course, corporate political activity becomes very important to be weighed to know the company’s G performance.
Fr example, since its first appearance in the late 1990s, the reporting standards developed by Global Reporting Initiative (GRI) were not strictly regulate the disclosure of lobbying. However, the latest one that took effect from 1 July 2018—just ten days ago!—adjust it more tightly. “…includes an organization’s participation in the development of public policy, through activities such as lobbying and making financial or in-kind contributions to political parties, politicians, or causes.” GRI also recommends, “The reporting organization should report: (1) the significant issues that are the focus of its participation in public policy development and lobbying; (2) its stance on these issues, and any differences between its lobbying positions and any stated policies, goals, or other public positions.”
What can be suggested to responsible companies about current political situation? There are some that seem very important. First, understand all the regulations related to what companies can and should not do with political donations. And this also includes donations given by the owners of the company as well as related parties. Secondly, openly disclose what political activities the company undertakes, whether done by the company alone or through a collection of companies in the same sector or through institutions such as the Chamber of Commerce (KADIN). Following GRI’s recommendations would be a good start for the companies already produce sustainability reports.
Third, the lobby for government policy change should only bring closer the company, Indonesia and the world to the achievement of SDGs, not the other way around. For example, companies that signed the Principles of Responsible Investment declared the following commitments: “Our expectation is that, when companies engage with public policy makers, they will support cost-effective policy measures to mitigate climate change risks and support an orderly transition to a low carbon economy. While an increasing number of companies have robust climate change policies and position statements and play a constructive role in policy discussions, we are concerned that many are also members or supporters of trade associations, think tanks and other third party organisations who lobby against policies to mitigate climate risks in a way that is inconsistent with our goal of maximising long-term portfolio value.”
Finally, it is important to emphasize that in matters of giving input to public policy regarding the achievement of SDGs, it is imperative that only companies with proper track records do so. Companies whose core business does not show sufficient ESG performance, or even reside in sectors that are diametrically oppose the objectives of SDGs, should not provide input, as it would be seen as a hypocritical. SDGs still have 12 years to achieve, so companies that want to contribute can still take action on ESG improvement first, also leave sectors and practices that conflict with sustainability.
Latest Trends in CSR and SDGs
There are some notable developments of CSR in Indonesia. First, related to soft and hard regulations. ISO 26000 was adopted as national standard in 2013 (through SNI ISO26000:2013), but until now the use is not yet widely spread, even among the most progressive companies. A Bill on CSR was discussed within the Parliament, but not considered as priority legislation in 2017. It was anticipated to reappear in 2018, as general election approaching, but that is not the case. However, even without such regulation in place, PIRAC’s study in 2016 discovered that local governments of 13 provincial, 44 municipalities, and 18 cities governments already introduced various kinds of CSR-related regulations, ranging from philanthropy taxes to development partnerships. Mostly, the local regulations just add burdens for companies.
In fact, there are also various other regulations related to CSR that are also important to note. There are several regulations, both in the form of laws and derivatives, on certain aspects such as those related to corporate governance, human rights, employment, the environment, fair operation practices, consumer protection, and community development. Certain industrial sectors, such as mining, also issue special regulations. This year, for example, there is Minister of Energy and Mineral Resources Regulation no. 25/2018 which among them regulate the development and empowerment of the community. In more detail, the regulation is translated into Minister of Energy and Mineral Resources Decree no. 1824 K / 30 / MEM / 2018 on Guidelines for Community Development Implementation.
Second, governance. ASEAN Corporate Governance Scorecard is effective since 2015, as part of ASEAN Economic Community. Results from 2012-2014 pilot measurements suggest that Indonesian companies are behind those of Singapore, Malaysia and Thailand. Indonesian companies definitely need to learn faster, conduct gap analysis, and develop corrective actions to catch up with their neighbours. But, progress so far is not encouraging. Most of the companies tend to wait for hard regulation in place. However, adjustment with national CG standard—namely KNKG standard of 2006—will take time, and so will revision of Law on Limited Liability Company (UUPT), if Indonesia wants to impose sustainability governance to all PT companies.
Impact measurement is the third trend to watch. Most of Indonesian companies still report merely on input indicators, most notably amount of money spent for each CSR project and the total. This is an embarassing fact for a country with more than two decades of experience with CSR. But there are at least two encouraging developments. The use of sustainability reporting and strategic CSR approach (most notably CSV and social investment) makes some companies try to measure their CSR performance, with outcome and impact indicators—not just inputs and outputs. And, more robust methodologies such as Social Return on Investment (SROI) might be used more widely within years to come. SROI Network Indonesia was enacted in 2015 by several CSR organizations, and recently got international recognition. Cases of SROI-based CSR impact measurement will be soon available to public.
Fourth, sustainability reporting. Around 160 companies in Indonesia produced sustainability reports in 2015-2016. The number is almost tripled compared to 2012. However, in terms of quality, the progress is much slower. The reporting companies are mostly from mining, manufacture, and financial sectors. Most of the reports still used GRI G3.1 in 2014, then most companies moved to GRI G4 for their 2015 reports published in 2016. But, a deeper look revealed that most reports still did not comply with G4 standard disclosure nor with G4 Sector Disclosure. With such conditions in Indonesia, in October 2016 the GRI SRS (Sustainability Reporting Standard) was launched, to be used by all reports published after June 2018. On the other hand, Financial Services Authority (OJK), through OJK Regulation on Sustainable Finance, also mandating less rigorous Sustainable Report for all financial institutions and public companies working in Indonesia started in 2019.
Fifth, the advancement of social business. Discourse on and practices related to social business/enterprise and social entrepreneurship make many people believe that business can be harnessed to solve social and environmental problems, profitably. The internationally recognized consulting firm BCG and multilateral agency UNDP, among other organizations, already conducted studies on social business phenomena in Indonesia, signaling its importance and promise for the future. Some international and national social enterprises already work in Indonesia, and the number is growing exponentially.
The last trend is related to SDGs. Indonesia has had quite a number of regulations related to SDGs, but has not specifically targeted how companies can contribute to SDGs. However, it can be learned from various international documents. An important document that explains how companies can choose the destination of SDGs that best suits their core business there are many. But most important is the SDG Compass made by GRI, UN Global Compact and WBCSD. Several other agencies also assist companies to ensure its core business impacts are managed appropriately, in accordance with the guidelines of SDGs. ICMM, Columbia University, and UNDP have each created documents for the mining industry. Documents for other industries are also easy to obtain.
Not just to improve the practice in the company, some documents have even provided guidance to investors and financial services agencies to invest in areas that are in line with the objectives of the SDGs. DWS Global Research Institute for example has issued document Integrating the UN Sustainable Development Goals into Investment Portfolios. PGGM also created a document entitled The Investor’s Perspective: How an asset manager can map its portfolio by the effects it has on people and planet – and what we can learn from this. The two documents are just published recently.
For the purpose of reporting, a document following the publication of SDG Compass is Linking the SDGs and GRI. This document explains that there are indeed many contributions that companies have made to SDGs if they have been following the reporting guidelines of the SDGs. However, a reporting guide that will really make a company’s contribution to SDGs can be fully understood will be launched on 17 or 20 July 2018 in New York. GRI and UN Global Compact will launch a possible document titled Practical Guide to Reporting on the SDGs. The public in Indonesia alone can enjoy a sneak peek session held on July 12, 2018. Once this document is released, companies around the world, including Indonesia, can make a report on the contribution of SDGs in standardized format so that they can be compared.
Conclusion: Sustainability is an Opportunity Not to be Missed
If a company enforces governance, and ensures high social and environmental performance then its financial performance will also be good? That is the most important question often asked. And the answer is getting more and more conclusive. Ten years ago, Marc Orlitzky had concluded that in general the relationship between sustainability performance and financial performance was positive. The direction of the relationship is also clear, which is mutually reinforcing. High sustainability performance is also mentioned as a solid fortress, protecting businesses from various threats, including from the economic and political crisis.
Quantitatively the calculation has also been done. Just to quote some of the most popular, what was concluded by Orlitzky continues to be supported. Sisodia, Sheth and Wolfe showed through the second edition of Firms of Endearment (2014) that the cumulative performance of companies with high ESG performance not only exceeded the S&P 500 to 14-fold, but also surpassed the Good to Great companies around 6 times. A meta-analysis by Friede, Busch and Basses in 2015 concluded “The ESG investing is empirically very well founded. Roughly 90% of studies find a nonnegative ESG-CFP relation. More importantly, the large majority of studies reports positive findings.” Researchers from Harvard University, Khan, Serafeim and Yoon (2016) found that if someone invested 1 dollar in 1994 in a company with high sustainability performance, then the value of the investment will be 28 dollars in 2014.
The conclusion is not only from research outside Indonesia. More or less the same results, although weaker and the number of studies still limited, have also been shown by studies here. The most recent is the research of Sarumpaet, Nelwan and Dewi (2017) who seek to see the relationship between PROPER rating with financial performance. They followed the developments between 2002 and 2012 and concluded that “superior environmental performance is associated with higher share price, whereas inferior environmental performance is value irrelevant to the market.” This means that the Indonesian market has appreciated companies with high environmental performance, but have not punished those who show low environmental performance.
Conditions that have been demonstrated at home and abroad clearly carry a message, namely that enforcing good governance and pursuing high social and environmental performance is actually a way of doing business that is compatible, not contrary, with the aim of profit making. Now the world has shown that sustainability has been formulated more clearly as SDGs, so striving for the achievement of SDGs is actually a lucrative business opportunity. The magnitude of business opportunities that are present because of this SDGs, as John Elkington puts it in his article published in Harvard Business Review in May 2017, is 12 trillion dollars per year. Whether companies in Indonesia want to take the opportunity or leave it, of course is up to each decision. Yet it seems we all know where the right decision is.