Bahlil Lahadalia, Minister of Investment; and Chairman, Indonesian Investment Coordinating Board (BKPM)

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On how environmental, social and governance (ESG) standards are shaping the investment landscape

To what extent has the Covid-19 pandemic impacted investment performance in Indonesia, particularly with regards to ESG?

BAHLIL LAHADALIA: The Covid-19 pandemic has had a widespread and systematic impact on the global economy. Investment levels have also been affected: investment in Indonesia was 3.7% lower in the third quarter of 2021 than the same period a year earlier. This decline occurred in almost all sectors, including the ESG-compliant segment. However, despite Covid-19-related challenges, some areas recorded positive results: the chemical and pharmaceutical segments, for instance, experienced an uptick in demand related to virus prevention and treatment. 

Focusing on the environmental element of ESG, the pandemic has had both a negative and positive impact on energy development across the globe. On the one hand, in many cases it has been difficult to build new power plants. On the other hand, mobility restrictions caused a decline in total energy use, which benefitted the planet. This energy reduction has been identified by many countries, including Indonesia, as the right time to transition to more renewable sources. 

How can Indonesian businesses benefit from ESG-related investments?

LAHADALIA: ESG-related considerations can play a crucial role in facilitating a business’ inclusive and long-term growth, with investors increasingly applying non-financial benchmarks to identify material risks and expansion opportunities. ESG investing includes an evaluation of not only social factors, but also of the corporate behaviour that dictates the size of the firm’s carbon footprint, risk management strategies and financial performance. This enables ESG-compliant investments to often outperform their peers in the long term. 

Besides being able to improve business performance, attract investors and increase a company’s share price, the implementation of ESG standards can help strengthen a company’s brand, increase consumer loyalty and widen market access. For instance, there is growing evidence that millennials are more likely to trust a company or purchase its product if the company has a reputation for being socially or environmentally responsible. Adherence to ESG standards can also widen access to financing and, in some countries, lead to financial or non-financial incentives like tax benefits. The broader introduction of such incentives would help accelerate the development of Indonesia’s ESG investment ecosystem.

What role will ESG-focused investments play in the medium-term strategy of the ministry?

LAHADALIA: Green considerations are expected to drive Indonesia’s sustainable development strategy in the future. There are business areas related to environmental conservation that look set to offer green investment opportunities over the coming years, such as renewable energy. 

One industry that has emerged stronger from the green revolution, and offers considerable growth potential for Indonesia, is electric vehicles. An integral player in the global industrial supply chain, Indonesia remains focused on downstream natural resources, and its electric vehicle industry can place the country among a group of economies targeting environmental sustainability. This is of particular importance for the transport sector, which – being one of the largest contributors to climate change – is coming into sharper focus as Indonesia and other signatories pursue the terms of the Paris Agreement.

After the energy and transport sectors, agriculture has a large impact on the climate. Of particular relevance to Indonesia, the EU is committed to sourcing palm oil – derivatives of which are used in a wide variety of consumer products, such as frying oil, baking products and confectionery – that is produced sustainably. 

On another note, Industry 4.0 is characterised by technological development and digitally connected machines, enabling production processes to become smarter and more efficient. The national Making Indonesia 4.0 roadmap was launched in 2018 to leverage these advancements for improved productivity and competitiveness – including for waste reduction through greater efficiency. As of 2021 the blueprint’s priorities included medical equipment and pharmaceuticals, as well as food and beverages, electronics, automotive, chemicals, and textiles and apparel. These areas will likewise be important for the Ministry of Investment as we target sustainable growth across Indonesia over the coming years, with ESG-related considerations expected to strengthen industry on a global level.

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