Indonesia submitted its Enhanced Nationally Determined Contribution (NDC) to the United Nations Framework Convention on Climate Change (UNFCCC), pursuant to which it commits to reduce greenhouse gas (GHG) emissions by 31.89% by 2030 and by 43.20% by 2030, conditional on the receipt of international support.1 The Government of Indonesia (GOI) has shaped its national regulatory policies based on its commitment to contribute to climate change actions. To support this commitment, at the end of 2021, the GOI issued Presidential Regulation No. 98 of 2021 regarding Carbon Economic Value2 (PR 98/2021), which was later supplemented by Minister of Environment and Forestry (MOEF) Regulation No. 21 of 2022 regarding Procedures for the Implementation of Carbon Economic Values (MOEF 21/2022).3 PR 98/2021 and MOEF 21/2022 are the framework for the establishment of carbon pricing instruments and govern the general rules of carbon trading, in addition to other climate change-related economic instruments such as result-based payments and carbon tax.
The carbon tax mechanism is governed by Law No. 7 of 2021 regarding the Harmonization of Tax Regulation4 (Law 7/2021). In addition, the GOI issued Presidential Regulation No. 112 of 2022 regarding the Acceleration of Renewable Energy Development for Electricity Supply5 (PR 112/2022), aimed at accelerating the transition to renewable energy by regulating the early retirement of Coal-Fired Power Plants (CFPPs).
In the financial sector, the Financial Services Authority (Otoritas Jasa Keuangan or OJK) published Sustainable Finance Roadmaps for 2015-2019 and 2021-2025, which are aimed at increasing the capacity of the financial services sector to adapt to a low-carbon economy.6 The OJK introduced the concept of “sustainable finance” as comprehensive support from the financial services sector to create sustainable economic growth by harmonizing economic and environmental interests.7 We discuss each key regulation on carbon trade, carbon tax, the renewable energy transition, and sustainable finance in greater detail below.
Carbon Trading
Under PR 98/2021, carbon trading can be conducted through: (1) emissions trading; and (2) GHG emissions offset.8 Under the emission trading scheme, the trade will be conducted by businesses and activities with emissions either above the regulated emission ceiling or below the regulated GHG emission ceiling imposed by the GOI or relevant ministries.9 The GHG emissions offset scheme only applies to businesses and activities without any determined emission ceiling that provide a statement of emission reduction using the results of mitigation actions from other businesses and activities.10 To conduct GHG emissions offset, businesses and activities with an emission surplus can sell their excess, and vice versa.
Carbon trading will be conducted through the sale and purchase of carbon units, which serve as proof of ownership in the form of a GHG Emission Reduction Certificate stated in one ton of carbon dioxide.11 A GHG Emission Reduction Certificate is granted upon registration with the National Registry System of Climate Change Control (SRN PPI) and further verification by an independent verifier. MOEF 21/2022 regulates that a GHG Emission Reduction Certificate may be issued if the GHG emission reduction is, among other things, permanent, accurate, measurable, and results from climate change mitigation actions.12 The GHG Emission Reduction Certificate may be utilized (i) as proof of performance of GHG emission reduction, (ii) for carbon trading, (iii) as payment for climate change mitigation action, (iv) as GHG emission compensation, and (v) as proof of performance of a sustainable business/activity to obtain green financing in the form of bonds or sukuk. At the moment, the necessary implementing regulations and procedures have yet to be issued, so the MOEF has yet to issue any GHG Emission Reduction Certificates.
PR 98/2021 allows carbon trading to be conducted cross-sector.13 Based on PR 98/2021 there are six sectors that are targeted for the implementation of climate change mitigation actions. These sectors are (i) energy, (ii) waste, (iii) industrial process and product use, (iv) agriculture, (v) forestry, and (vi) other sectors in accordance with the development of technology.14 Specifically for power plants, the carbon market is regulated under Minister of Energy and Mineral Resources (MEMR) Regulation No. 16 of 2022 regarding Implementation Procedures for Carbon Pricing in the Power Plant Sub-Sector (MEMR 16/2022).15 MEMR 16/2022 outlines the prerequisite and subsequent procedures for carbon trading that must be taken by holders of an Electricity Supply Business License for Public Purpose or an Electricity Supply Business License for Own-Use.
On 12 January 2023, the GOI enacted Law No. 4 of 2023 regarding the Development and Strengthening of the Financial Sector (Law 4/2023).16 This law, among other things, amends existing laws to include provisions on carbon exchange and sets out provisions for the creation of a carbon exchange. Under the amended Law No. 21 of 2011 regarding the OJK,17 the OJK is mandated to prepare regulations required to implement carbon trading. The carbon exchange will be licensed by the OJK, whose authority has been expanded to include regulatory and supervisory authority over carbon trading. According to Law 4/2023, the carbon exchange shall be a system that (i) regulates carbon trading and (ii) records ownership of carbon units.18 Carbon trading through the carbon exchange shall be done with (i) the development of carbon trading infrastructure; (ii) the regulation of state revenue deriving from carbon trading; and (iii) the administration of carbon trading transactions.19
Carbon units can also be traded overseas in international markets through emission trading and emission offset.20 PR 98/2021 indicates that any contractual arrangement which transfers the value of an emission reduction certificate in any international market must obtain the MOEF’s prior approval.21 PR 98/2021 does not clearly regulate the procedure for transferring an emission reduction certificate or the process for obtaining MOEF approval, details which are expected to be provided in a future implementing regulation. Pursuant to the MOEF’s Position Paper dated 5 May 2023, the MOEF confirmed that Indonesia is open to international carbon trade. However, such trade must be systematically regulated, with upstream and downstream carbon governance, supervised by the government. The MOEF said the authorization of the state party to the Paris Agreement would be required.
Carbon Tax
Under Law 7/2021, carbon emissions having a negative impact on the environment will be subject to carbon tax, with the tax subject being private persons or entities purchasing goods containing carbon or conducting activities resulting in carbon emissions.22 Taxpayers participating in carbon emission trade, carbon emission offset, or any other mechanism set out under environmental regulations may be subject to a carbon tax deduction or other treatment for the fulfilment of the carbon tax payer’s obligations.23 The provisions on the rate, calculation, payment, reporting, and other mechanisms of the carbon tax are expected to be further regulated by the Minister of Finance.24 Initially targeted for launch in April 2022, the imposition of a carbon tax is now not expected until around 2025. Businesses in carbon-intensive sectors such as coal-fired power plants, oil and mining, cement, plastic, petrochemicals, and palm oil plantations, among others, will be the most heavily affected. It is expected that implementation will first target coal-fired power plants and then broaden to other industries.
Renewable Energy Transition
In addition to provisions on carbon economic value, the GOI issued Presidential Regulation No. 112 of 2022 regarding the Acceleration of Renewable Energy Development for Electricity Supply (PR 112/2022).25 PR 112/2022 mandates the MEMR to develop a roadmap to accelerate the early retirement of CFPPs.26 The MEMR explicitly prohibits the development of CFPPs, with the exception of (a) CFPPs as already stipulated in the existing Electricity Supply Business Plan approved by the MEMR prior to the enactment of PR 112/2022; or (b) CFPPs which are (i) integrated with a listed National Strategic Project that provides increasing added value for the natural resources sector and makes a large contribution to job creation or national economic growth; (ii) committed to a minimum 35% reduction in GHG emissions within 10 years of the CFPP’s operation date in contrast to the average GHG emissions of the CFPP in 2021; and (iii) operating only until no later than 2050.27 PR 112/2022 also instructs Indonesia’s state-owned electricity company, PT Perusahaan Listrik Negara (PLN), to accelerate the early termination of (a) the operation of PLN’s CFPPs and/or (b) CFPP Power Purchase Agreements with Independent Power Producers.28 In addition to an energy transition strategy, PR 112/2022 further regulates (i) tendering for renewable projects, (ii) tariff mechanisms, and (iii) incentives provided for renewable energy projects.
Sustainable Finance
Under the OJK’s Sustainable Finance Roadmap for 2015-2019, one of the things that must be realized is the development of green bonds, the issuance of which is intended to maintain or enhance environmental sustainability. The OJK issued OJK Regulation No. 60/POJK.04/2017 of 2017 regarding the Issuance and Requirements for Green Bonds (OJK 60/2017).29 OJK 60/2017 regulates the issuance of green bonds to finance or refinance environmentally friendly business activities aimed at protecting, improving, and/or increasing the quality or function of the environment.30 These business activities include: (i) renewable energy; (ii) energy efficiency; (iii) pollution prevention and control; (iv) management of biological natural resources and sustainable land use; (v) conservation of terrestrial and aquatic biodiversity; (vi) eco-friendly transportation; (vii) sustainable water and wastewater management; (viii) climate change adaptation; (ix) products that can reduce the use of resources and produce less pollution; (x) environmentally sound buildings that meet standards or certifications that are recognized nationally, regionally, or internationally; and (xi) other environmentally friendly businesses or activities.31 At least 70% of the funds from the public offering of green bonds must be used to finance environmentally friendly business activities.32 The OJK has reported that since OJK 60/2017 was issued green bonds amounting to USD3.72 billion have been issued.33 Moving forward, the OJK plans to increase the financial sector’s awareness of sustainable finance.34
The GOI has shown its intent to proceed with framework regulations for carbon tax and carbon trading through Law 7/2021 and PR 98/2021, respectively. The aim of these regulations is to have a tremendous effect on climate regulation in Indonesia, especially in terms of controlling and reducing GHG emissions. In addition, the GOI has begun to pay more regulatory attention to the development of renewable energy, with the provisions under PR 112/2022 undertaking to address key issues in the development of renewable energy and mandating a more assertive energy plan. Acknowledging the need for support from the financial sector, the OJK has passed regulations encouraging investments in businesses that can help address climate change. Considering the above, it is clear the GOI has shown its commitment to its NDC.
Directors’ Duties and Climate Change
The general duties and liabilities of members of the board of directors of an Indonesian limited liability company are regulated under Law No. 40 of 2009 regarding Limited Liability Companies35 (Company Law). The Company Law recognizes and requires a two-board system, consisting of a board of directors and a board of commissioners. The board of directors constitutes the company’s management and directors are the day-to-day operating officers of the company, managing the company in the interest of the company and in accordance with its purposes and objectives.36 The board of commissioners serves a supervisory function.
Subject to the terms of the company's Articles of Association (AOA), the board of directors may generally represent the company. The Company Law stipulates that if the board of directors consists of more than one director, each director is authorized to represent the company unless stipulated otherwise in the company’s AOA.37 The AOA may stipulate which directors can represent the company. Often, the AOA will provide that the company can only be represented by the president director, acting alone, or any two other directors, acting jointly. The Company Law further regulates that if the board of directors consists of two or more directors, the assignment of managerial functions and authorities among the directors may be stipulated based on resolutions of the General Meeting of Shareholders (GMS) of the company.38 If the GMS does not stipulate this, the allocation of management authorities and responsibilities among the directors shall be stipulated in resolutions of the board of directors.39 Directors may delegate duties and functions to other employees, but they remain legally responsible for all actions taken on behalf of the company.
Each director is fully responsible personally for losses suffered by the company if the concerned member has made mistakes and been negligent in carrying out his/her duties.40 Shareholders representing at least 1/10 (one-tenth) of the total voting shares of the company may file a claim through the district court against directors who, due to their mistakes and negligence, have caused losses to the company.41 Directors shall not be liable for losses of the company if the directors can prove that: (i) the losses were not caused by their mistakes or negligence; (ii) they managed the company in good faith and prudently, in the interest of and in accordance with the purposes and objectives of the company; (iii) there were no conflicts of interest either directly or indirectly in their management acts causing the losses; and (iv) they took action to prevent said losses from occurring and continuing.42
Indonesia does not have specific regulations or policies regarding directors’ duties in addressing climate change. However, in fulfilling directors’ fiduciary duty to act for the best interest of the company, directors should take climate change risks into consideration. Recognizing and addressing climate change risks have become increasingly important due to their potential impact on companies in light of the GOI’s and other states’ commitment to their NDCs. The drivers influencing directors' actions in relation to mitigating climate change risks can vary and may include government regulation, the influence of their regional company, or their local internal agenda.
Government regulation is a significant driver that can shape directors' actions regarding climate change risks. The GOI has implemented regulations aimed at mitigating climate change by reducing greenhouse gas emissions and transitioning to renewable energies. Directors have a responsibility to consider these regulations when making decisions for their companies’ management. For example, if a company is engaged in the operation of coal power plants, directors must assess the potential financial risks associated with changing regulations, i.e., the phasing out of coal in the energy sector as mandated under PR 112/2022 and the imposition of a carbon tax under Law 7/2021.
The influence of a regional company can also drive directors to consider climate change risks. In some cases, Indonesian companies are part of a larger corporate structure, with a regional company overseeing their operations. The regional company may have established sustainability goals that require its subsidiaries to address climate change risks.43 Directors of Indonesian subsidiaries may be influenced by the strategic direction and expectations set by the regional company, leading them to incorporate climate change considerations into their decision-making processes.
Directors' actions may also be driven by the local internal agendas of their companies, which encompass the priorities and demands of the companies' stakeholders. Directors who are responsive to these concerns and recognize the business benefits of addressing climate change risks may prioritize them as part of their fiduciary duty.44 This can involve adopting sustainable practices, reducing greenhouse gas emissions, or integrating climate risk assessments into strategic planning.
In addition, since the board of directors is authorized to represent the company, the board of directors is essentially responsible for ensuring that the company complies with all environmental obligations to which the company is subject, including regulations aimed at mitigating the impact of climate change. Pursuant to the Company Law, companies that carry out business activities in the field of and/or related to natural resources are required to implement social and environmental responsibility by committing to participate in sustainable economic development in order to improve the quality of life and the environment for the company, local communities, and society in general.45 Other laws imposing environmental obligations on companies include Law No. 32 of 2009 regarding Environmental Protection and Management46 (Law 32/2009), Law No. 41 of 1999 regarding Forestry47 (Law 41/1999), and Law No. 18 of 2013 regarding Prevention and Eradication of Forest Destruction (Law 18/2013).48 The imposition of social corporate liability is governed under Government Regulation No. 47 of 2012 regarding Corporate Social and Environmental Liability (GR 47/2012). Under GR 47/2012, a company running a business utilizing natural resources is required to have a corporate social and environmental plan in place and implement said plan. Indonesia also has other regulations concerning agriculture, peatlands, energy and transportation, industry, and waste management, among others.
The above laws impose corporate criminal liability for environmental crimes committed by corporations. Criminal liability may also be imposed on directors. Pursuant to Law 32/2009, if an environmental crime is committed by, for, or on behalf of a corporation, any penalties shall be imposed on (i) the corporation and/or (ii) the person who gave the order to commit such criminal activity or any person acting as a leader in such crime (‘functional perpetrators’).49 If the crime was conducted by a person within the scope of their employment, the person who gave the order or led the crime shall be subject to criminal sanction, regardless of whether the crime was committed together or individually.50 If an environmental crime is conducted by a corporation, Law 32/2009 allows for the possibility of criminal sanctions to be imposed on the leader(s) of the corporation, specifically those persons with authority over the physical perpetrators and any persons who accepted the actions of the physical perpetrators by agreeing, allowing, or not sufficiently supervising the actions of physical perpetrators, and/or parties who put in place the policies that allowed these criminal acts to occur. 51 Sanctions for individuals can be in the form of imprisonment and fines.52
In addition to Law 32/2009, Law 41/1999 and Law 18/2013 contain provisions which state that for certain corporate environmental crimes, both the corporation and the officers shall be criminally liable and subject to criminal sanctions in the form of fines and/or imprisonment.53 However, Law 41/1999 and Law 18/2013 do not provide the specific elements that must be proven to hold a corporate officer criminally responsible for crimes committed by the corporation. Further, Law 32/2009 and Law 41/1999 impose imprisonment, in addition to fines, for corporations that commit environmental crimes.
In practice, in past court cases in Indonesia, the courts imposed criminal liability on individuals acting as corporate officers or directors. In Republic of Indonesia v. PT Adei Plantation & Industry (PT API), the court found that PT API was guilty and liable for environmental crimes.54 The court also ruled that if PT API was not able to pay the fine, the director, even though he was not a defendant, would be imprisoned for five months. In Republic of Indonesia v. Kosman Siboro, although the court was unsure of the director’s role in the crime, they still found him liable due to his position as director of the corporation.55 In both cases, the courts found that because the companies were subject to both fines and imprisonment pursuant to the environmental provisions which the companies had violated, it was also necessary to subject the directors to imprisonment, since corporations cannot be imprisoned. In short, it is evident that Indonesia’s environmental law and Indonesian courts are open to the possibility of piercing the corporate veil to hold directors criminally responsible for environmental crimes committed by companies.
Directors' Disclosure Obligations and Climate Change
In general, any business actor is required to provide accurate, transparent and timely information related to the protection and management of the environment.56 The disclosure is made by submitting the environmental approval, e.g., Environmental Impact Assessment, Environmental Management Efforts and Environmental Monitoring Efforts, or Statement of Commitment to Environmental Management and Environmental Monitoring, to the MOEF, governor, or regent/mayor in accordance with their authority. The disclosure is also made by submitting periodical reports with regard to the company’s environmental requirements or obligations related to its environmental approval. The specific content and format of the required reporting may differ from one company to another, noting that the environmental approval for different types of business activities may result in different obligations and fulfillments. For example, a business actor that manages hazardous and toxic waste is required to submit a periodical hazardous and toxic waste management report, which shall consist of: (i) name, source, amount, and characteristics of the hazardous and toxic waste, and (ii) implementation of the hazardous and toxic waste management activities.57 The periodical report is usually submitted to the local/regional environmental management agency under the regional government, referred to as the Environment Services Office (Dinas Lingkungan Hidup or DLH), every six months, depending on the requirements set out in the environmental document.
Further, the Environmental Law requires every person and company that commits environmental contamination or destruction to disclose the contamination and destruction to the impacted communities, in addition to taking other steps to manage the contamination and destruction, such as by isolating the contamination or destruction and stopping the source of contamination or destruction.58
Environmental contamination and destruction shall also be reported to government authorities by the persons in charge of businesses entities, which may include directors of companies. For instance, contamination disclosure is explicitly required for groundwater contamination.59 This required groundwater contamination report should made to the relevant government authority, e.g., the MOEF, governor, and/or regent/mayor, through the online Quick Response System managed by the MOEF (accessible at http://plttdlb3.menlhk.go.id/qrs/landing) within 24 hours as of the knowledge of the occurrence of the contamination.60 The report shall include the location, time, cause, possible impact on the environment, and measures that have been taken to stop or repair the contamination.61 For air contamination and sea contamination, the person at the company involved in change of managing the contamination is required to submit reports on the measures required to stop the air or sea contamination to the MOEF, governor, and/or regent/mayor within 24 hours as of the knowledge of the occurrence of the contamination.62
Non-disclosure of contamination may be subject to administrative sanctions if the environmental document requires such contamination disclosure. In addition, conveying false, misleading, partial, or damaging information is subject to a maximum of one year imprisonment and a maximum criminal fine of IDR 1 billion.63
The OJK imposes additional disclosure obligations for public companies, issuers, and financial service institutions. OJK Regulation No. 51/POJK.03/2017 regarding the Implementation of Sustainable Finance for Financial Service Institutions, Issuers, and Public Companies (OJK 51/2017) requires financial service institutions, issuers, and public companies to implement sustainable finance.64 Financial service institutions are obliged to submit annual Sustainable Finance Action Plans (SAFP) to the OJK, prepared by the company’s board of directors and approved by the board of commissioners.65 The SAFP must be prepared based on the priorities of each financial service institution and at a minimum cover the (i) development of sustainable financial products and/or services including increasing the financing portfolio, investment or placement in financial instruments or projects that are in line with the implementation of sustainable finance; (ii) development of the financial service institution’s internal capacity; and (iii) changes to the organization, risk management, governance, and/or standard operating procedures of the financial service institution in accordance with the principles of implementing sustainable finance.66
Public companies, issuers, and financial service institutions also are required to submit annual Sustainability Reports to the OJK.67 The Sustainability Report shall at a minimum include (i) an explanation on sustainability strategy; (ii) a summary of sustainability aspects (economic, social, environmental); (iii) company profile; (iv) director’s explanation of policies to respond to challenges in fulfilling sustainability strategies, the implementation of sustainable finance, and strategies for achieving targets; (v) sustainability governance; (vi) sustainability performance; (vii) written verification from an independent assurance service provider of the contents of the Sustainability Reports ; (viii) readers’ feedback section; and (ix) issuer’s or public company’s response to the readers’ feedback.68 The Sustainability Report must be published on the company’s website.69 Failure to submit and publish the Sustainability Report is subject to administrative sanctions in the form of reprimand or written warning.70 These Sustainability Report are expected to provide transparency in the environmental impact of public companies, issuers, and financial service institutions.
Practical Implications for Directors
Given the GOI’s focus on managing climate change, to ensure companies comply with climate change mitigation regulations and environment-related disclosures, directors of Indonesian companies should:
- Assess and, if necessary, modify the company’s governance and operating procedures regarding compliance with environmental obligations to mitigate climate change. This includes considering any negative impacts resulting from the company's activities and products, as well as potential legal risks associated with environmental obligations.
- Assign the identification and assessment of environmental impacts and climate risks to a designated management team that reports directly to the board of directors.
- For industrial companies, conduct regular environmental site assessments to identify possible on-site violations of environmental regulations.
- Evaluate reporting and disclosure frameworks and guidelines to ensure that the company's disclosures align with regulatory requirements and, where applicable, meet investor requirements.
- Initiate, a board agenda to develop a climate transition roadmap that includes transparent targets for carbon neutrality or reduction, bearing in mind the relevant regulations issued by the GOI.
- Entrust relevant board committees, such as the risk, audit, legal and governance, scenarios/strategy, nominations/remuneration, or sustainability/corporate responsibility committees, with translating the company’s long-term strategy into a clear decision-making process specific to each committee's responsibilities.
Consult with appropriate legal counsel and subject matter experts to discuss environmental obligations, disclosure requirements, and best practices.
Contributors:
- Ira A. Eddymurthy, Dewi Savitri Reni
- Aldilla S. Suwana, Raisya Majory
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