IFC and OJK Raising the Bar on Environmental, Social, and Corporate Governance Standards IFC was founded on a bold idea: that the with industry and other stakeholders to nd private sector is essential to development. We innovative solutions that open up opportunities have six decades of investment and advisory for economically, socially, and environmentally experience in global emerging markets. We now sustainable private investment. reach millions of people in over 100 countries, creating jobs and building a better future to Since 2012, IFC’s Indonesia Corporate support the World Bank Group’s twin goals: Governance Project, which is implemented with ending extreme poverty and boosting shared the support of Switzerland’s State Secretariat for prosperity. Economic Affairs (SECO), has assisted the Financial Services Authority (OJK) to embark on To achieve these goals, IFC focuses on helping our a far-reaching, multi-year reform to strengthen clients understand and manage the the country’s corporate governance framework environmental, social, and corporate governance and investment climate. A key part of IFC’s (ESG) risks to do business sustainably. We partner corporate governance work involves helping to “IFC has always believed that the private sector is a powerful driver of growth. However, the private sector will not be able to access capital markets, let alone thrive without a consistent regulatory framework and proper supervision and enforcement. OJK’s commitment to its vision and mission is commendable and should be supported by all market players. IFC is grateful to have been a part of this journey." Azam Khan IFC Country Manager for Indonesia, Malaysia, and Timor-Leste IN PARTNERSHIP WITH improve the Indonesian regulatory environment support of SECO and the UK Climate Change for corporate governance. Building on our Unit (UK CCU), has provided technical assistance frontline experience as an investor, we collaborate to OJK to elevate the sustainable nance agenda closely with the World Bank to ensure that new and develop the corresponding regulations since corporate governance regulations and codes in 2013. The program aims to support Indonesian Indonesia are based on international best nancial institutions in improving their practices. environmental and social performance and strengthening risk management in their lending Corporate governance, de ned as the structures practices, moving toward a sustainable approach and processes by which companies are directed in line with international standards and best and controlled, is critical to a well-functioning practices. and vibrant private sector in Indonesia. Good corporate governance helps companies operate Our partnership with OJK coincided with the more ef ciently, mitigate risk, safeguard against global effort to achieve the Sustainable mismanagement, and improve access to capital. Development Goals (SDGs) and concerns This, in turn, encourages new investments, creates surrounding climate change, which paved the way jobs, and boosts economic growth. for developing a sustainable nance framework in Indonesia. In 2015, OJK issued the Sustainable Following our work in corporate governance, we Finance Roadmap Phase 1:2015-2019 and the also partnered with OJK in developing Regulation on the Implementation of Sustainable Indonesia’s rst-ever sustainable nance Finance for Financial Services Institutions, Issuers, framework. IFC’s Environmental and Social Risk and Publicly Listed Companies in 2017. Management Program in Indonesia, with the IFC AND OJK PARTNERSHIP THROUGH THE YEARS “Strengthening the capital market is a collective effort, which cannot be done by the regulators alone. In order to align Indonesia's corporate governance regulatory framework with international best practices, OJK works closely with international organizations, including IFC. This cooperation needs to continue to raise governance standards among Indonesian companies, promote transparency and accountability in the corporate sector, and enhance public trust and con dence in Indonesian capital markets." Wimboh Santoso Chairman Board of Commissioners Otoritas Jasa Keuangan Collaboration with IFC has become part of OJK’s journey in championing pivotal regulatory reforms in corporate governance and sustainable nance in Indonesia, which includes: Indonesia Corporate Governance Roadmap A comprehensive reform to strengthen Indonesia’s corporate governance regulatory framework and standards for listed companies and new issuers in line with regional and international best practices. The Roadmap launched by OJK outlines planned corporate governance improvements 2014 with a concrete implementation schedule. OJK issued four regulations in support of good corporate governance practices: OJK Regulation No.32/POJK.04/2014 on Planning and Holding of General Meetings of Shareholders of Publicly Owned Companies OJK Regulation No.33/POJK.04/2014 on Board of Directors and Board of Commissioners of Issuers or Public Companies OJK Regulation No.34/POJK.04/2014 on Nomination and Remuneration Committees of Issuers or Public Companies OJK Regulation No.35/POJK.04/2014 on Corporate Secretary of Issuers or Public Companies Indonesia’s first “comply or explain” Corporate Governance Guidelines for Public Companies. OJK issued corporate governance guidelines set out in: OJK Regulation No.21/POJK.04/2015 on The Implementation of Corporate Governance Guidelines of Public Company OJK Circular Letter No.32/SEOJK.04/2015 on Corporate Governance Guidelines of Public Company MARKET IMPACT Indonesia’s first Sustainable Finance Roadmap Our successful collaboration The Sustainable with OJK Finance in corporate Roadmap governance issued and sustainable by OJK embodies nance regulatory Indonesia’s strong commitment reform to has had several 2015 increasing Indonesia’s impacts in and positive awareness market, improving which the private includes: sector’s environmental and social performance. The Roadmap sets forth a detailed work plan for the financial services industry under OJK’s authority (banking, capital market, and non-bank financial services). The Roadmap laid out, | On corporate governance, among others, for theincludes the impact the timeline an improved development score finance of sustainable of the 100 Indonesian regulation, largest sustainable companies listed financial ASEAN CG on theincentives products, for Scorecard (ACGS). Based financial institutions, on Indonesian and coordination Institute among for government agencies. Corporate Directorship’s assessment, the average score for the top 100 listed companies increased from 55.1% in 2014 to 66.5% in 2018 (an increase of 21%). A C 100 I L L C The 4th annual meeting of the Sustainable Banking Network in Bali, Indonesia ASEAN The CG SCORECARD annual meeting of the Sustainable Banking Network in 2016YEAR that was co-hosted by OJK and Part IFC brought together nearly 300 participants from over 25 emerging markets, including financial 2016 regulators, banking associations, banks, and development partners. The meeting was the largest Total gathering of decision-makers on the role of banking 66.5% sector policy 65.1% 63.9% 59.9%industry and voluntary 55.1% (Weighted Average Part A-E) initiatives to promote sustainable finance to date. Part A 51.2% 54.4% 63.5% 56.9% 49.9% Rights of Shareholders B Part Indonesia’s first Sustainable Finance 41.0% for41.3% 43.0%Regulation Services 37.2% Financial39.0% Equitable Treatment of Shareholders Institutions, Issuers, and Publicly Listed Companies C issued the first regulation on sustainable finance in Indonesia that mandates all financial Part OJK 2017 82.2% 81.7% 79.4% 78.0% 69.6% of Stakeholders Roleinstitutions to integrate sustainable principles in their business process, namely OJK Regulation No. 51/POJK.03/2017 on the Implementation of Sustainable Finance for Financial Services Part D Institutions, Issuers, and Publicly Listed Companies. 76.7% The regulation 74.7% (based on 75.6% an academic 72.9% paper 70.1% Disclosure and Transparency produced with IFC’s assistance) covers sustainable finance principles, the timeline for Part implementation E by financial institutions, and the requirement to submit a Sustainable Finance and Action Plan of Responsibilities Sustainability the Board Report. 64.0% 61.5% 61.1% 55.9% 50.2% *Source: Indonesian Institute for Corporate Directorship. **The data in this table excludes 23 questions, which are classi ed as “Mandatory Default” – meaning that all 23 questions are mandated in local regulations, and companies will automatically receive 100% compliance rate for these questions. Technical Guidelines for Banks to support the implementation of OJK Regulation on Sustainable Finance IFC assisted OJK in developing Technical Guidelines for Banks to implement sustainable finance 2018 regulation. The Guidelines provide the first-ever classification of 12 sustainable business activities to help banks improve their sustainable portfolio financing/lending. It also provides further elaboration on the drafting of the Sustainable Finance Action Plan and Sustainability Report. Adopted the Technical Guidelines on Sustainable Finance for Banking Supervision IFC assisted OJK in developing technical guidelines for supervisors to oversee the 2019 implementation of sustainable finance regulation. The Guidelines were issued and adopted by MARKET IMPACTOJK in early 2020 as an internal document to monitor and evaluate the Sustainable Finance Action Plan and Sustainability Report submitted by Indonesian banks. Besides Our successful the banking collaboration withsector, OJK in IFC also helped corporate OJK develop governance andthe Technical Guidelines sustainable for Capital nance regulatory reform market and Non-Bank Institutions on Sustainable Finance has had several positive impacts in Indonesia’s market, which includes: Implementation. | On corporate governance, the impact includes an improved score of the 100 Indonesian largest listed companies on the ASEAN CG Scorecard (ACGS). Based on Indonesian Institute for Corporate Directorship’s assessment, the average score for the top 100 listed companies increased from 55.1% in 2014 to 66.5% in 2018 (an increase of 21%). A C 100 I L L C ASEAN CG SCORECARD YEAR Part Total 66,5% 65,1% 63,9% 59,9% 55,1% (Weighted “Economic Average development Part A-E) is critical to building a more prosperous society. To create economic Part A infrastructure. growth, Indonesia must invest in developing its51,2% 63,5% mass56,9% 54,4% However, infrastructure 49,9% Rights of Shareholders development must consider the environmental and social impacts to prevent unintended Part B For that reason, the infrastructure development of a country must be in line with consequences. 43,0% 41,0% 41,3% 39,0% 37,2% Equitable Treatment of Shareholders the Sustainable Development Goals. Utilizing sustainable/green nancing, nancial institutions Part C Role ofrole have a critical in providing much-needed 82,2% Stakeholders 81,7%ensuring nancing while 79,4% 78,0% 69,6% that infrastructure development is undertaken in an environmentally and socially responsible manner.” Part D 76,7% 74,7% 75,6% 72,9% 70,1% Disclosure and Transparency Part E 64,0% 61,5% 61,1% 55,9% 50,2% Wimboh Santoso Responsibilities of the Board Chairman *Source: Indonesian Institute for Corporate Directorship. Board of Commissioners **The data in this table excludes 23 questions, which are classi ed as “Mandatory Default” – meaning that all Otoritas 23 questions are mandated in local regulations, and companies will automatically receive Jasa Keuangan 100% compliance rate for these questions. | As evidence of further progress in corporate governance, in 2017, 4 Indonesian listed companies were included in the category of the Top 50 Publicly Listed Companies in ASEAN compared to only 2 Indonesian companies included in the 2015 list, based on the assessment criteria and methodology developed by the ASEAN Capital Market Forum. Indonesian companies included in the Top 50 ASEAN Publicly Listed Companies (based on ASEAN Corporate Governance Scorecard) | As evidence of further progress in corporate governance, in 2017, 4 Indonesian listed companies were included in the category of the Top 50 Publicly Listed Companies in ASEAN compared to only 2 Indonesian companies included in the 2015 list, based on the assessment criteria and methodology developed by the ASEAN Capital Market Forum. Indonesian companies included in the Top 50 ASEAN Publicly Listed Companies MARKET IMPACT(based on ASEAN Corporate Governance Scorecard) Our successful collaboration with OJK in corporate governance and sustainable nance regulatory reform Bank CIMB Niaga Antam has had several positive impacts in Indonesia’s market, which includes: Bank Danamon Indonesia Bank BTN | Bank CIMB Niaga On corporate governance, the impact includes an improved score of the 100 Indonesian largest listed companies on the ASEAN CG Scorecard (ACGS). BasedBank Mandiri Institute for on Indonesian Corporate Directorship’s assessment, the average score for the top 100 listed companies increased from 55.1% in 2014 to 66.5% in 2018 (an increase of 21%). | Indonesia also climbed in the World Bank’s Doing Business ranking from 120 in 2014 to 73 in 2020. One of the contributing factors is that Indonesia has strengthened minority investor A protections byC 100 and increasing shareholder rights I roles in major L corporate C and requiring L decisions greater ASEAN corporate transparency. CG SCORECARD YEAR Part INDONESIA 140 Total GOING BUSINESS 66,5% 65,1% 63,9% 59,9% 55,1% (Weighted Average Part A-E) RANKING 70 Part A 51,2% 54,4% 63,5% 56,9% 49,9% Rights of Shareholders Part B 0 2014 43,0% 2016 2015 41,0% 2017 41,3% 2018 39,0% 2020 2019 37,2% Equitable Treatment of Shareholders Part C 82,2% 81,7% 79,4% 78,0% 69,6% | Role of Stakeholders IFC-supported OJK Regulation on Sustainable Finance has had positive impacts on Indonesia’s Part D and led to an increase in sustainable portfolio nancing among Indonesia’s largest banks. market 76,7% 74,7% 75,6% 72,9% 70,1% Disclosure and Transparency Part Regulation OJK E on Sustainable Finance became mandatory for the largest banks in Indonesia 64,0% 61,5% 61,1% 55,9% 50,2% Responsibilities (BUKU 4, BUKU 3,the of and Board foreign-owned banks) during the rst implementation phase in 2019 and has pushed sustainable portfolio nancing in these banks. The regulation requires banks to report *Source: Indonesian Institute for Corporate Directorship. their sustainable nance implementation through a sustainability report, including their funding of **The data in this table excludes 23 questions, which are classi ed as “Mandatory Default” – meaning that all 23 questions business sustainable activities. are mandated Seventeenand in local regulations, banks reported companies will $81 billion in automatically sustainable receive portfolio 100% compliance rate for these questions. nancing in their 2019 sustainability/annual report, which shows a 139% increase from 2017. S P F BUKU , BUKU | F B 2017-2019 ( ) 4 Indonesian listed companies As evidence of further progress in corporate governance, in 2017, were included in the category of the Top 50 Publicly Listed Companies in ASEAN compared to 81 only 2 Indonesian companies included in the 2015 list, based on the assessment criteria and methodology developed by the ASEAN Capital Market Forum. 33.9 35.9 Indonesian companies included in the Top 50 ASEAN Publicly Listed Companies (based on ASEAN Corporate Governance Scorecard) 2017 2018 2019 12 B The sustainableBank CIMB nance Niaga initiative’s Antam success prompted OJK to develop other green nancing schemes (including the issuance of OJK Regulation No.60/POJK.04/2017 on Green Bonds aimed to Bank Danamon Indonesia Bank BTN encourage the development of environmentally friendly capital market products). It has also | nancial stimulated Indonesian banks to issue innovative sustainableBank (green/gender/sustainable bonds/loans): CIMB products Niaga Bank Mandiri • In 2018, Bank OCBC NISP became the rst commercial bank to issue green bonds in Indonesia to nance climate-related projects in line with the Green Bond Principles. IFC invested $150 million in this project. • In 2019, Bank Rakyat Indonesia issued the rst Global Sustainability Bond worth $500 Indonesia alsowith million climbed in the World a ve-year Bank’s tenor to Doing support Business ranking employment from generation, 120 in 2014 to 73 in socio-economic Bank Danamon Indonesia Bank BTN Bank CIMB Niaga Bank Mandiri | Indonesia also climbed in the World Bank’s Doing Business ranking from 120 in 2014 to 73 in 2020. One of the contributing factors is that Indonesia has strengthened minority investor protections by increasing shareholder rights and roles in major corporate decisions and requiring greater corporate transparency. INDONESIA 140 DOING BUSINESS RANKING 70 0 2014 2015 2016 2017 2018 2019 2020 | IFC-supported OJK Regulation on Sustainable Finance has had positive impacts on Indonesia’s market and led to an increase in sustainable portfolio nancing among Indonesia’s largest banks. OJK Regulation on Sustainable Finance became mandatory for the largest banks in Indonesia (BUKU 4, BUKU 3, and foreign-owned banks) during the rst implementation phase in 2019 and has pushed sustainable portfolio nancing in these banks. The regulation requires banks to report their sustainable nance implementation through a sustainability report, including their funding of sustainable business activities. Seventeen banks reported $81 billion in sustainable portfolio nancing in their 2019 sustainability/annual report, which shows a 139% increase from 2017. S P F BUKU , BUKU F B 81 - ( ) 33.9 35.9 2017 2018 2019 12 B | The sustainable nance initiative’s success prompted OJK to develop other green nancing schemes (including the issuance of OJK Regulation No.60/POJK.04/2017 on Green Bonds aimed to encourage the development of environmentally friendly capital market products). It has also stimulated Indonesian banks to issue innovative sustainable nancial products (green/gender/sustainable bonds/loans): • In 2018, Bank OCBC NISP became the rst commercial bank to issue green bonds in Indonesia to nance climate-related projects in line with the Green Bond Principles. IFC invested $150 million in this project. • In 2019, Bank Rakyat Indonesia issued the rst Global Sustainability Bond worth $500 million with a ve-year tenor to support employment generation, socio-economic advancement, affordable housing, green transportation, and green buildings. • In 2019, Bank Tabungan Pensiunan Nasional received a green loan from IFC for US$150 million with a four-year tenor. The proceeds from the loan will be used for green nancing and nancing to MSMEs. • In 2020, Bank OCBC NISP issued additional green and gender bonds in which IFC • In 2019, Bank Tabungan Pensiunan Nasional received a green loan from IFC for greater corporate transparency. US$150 million with a four-year tenor. The proceeds from the loan will be used for green nancing and140nancing to MSMEs. INDONESIA GOING BUSINESS RANKING 70 • In 2020, Bank OCBC NISP issued additional green and gender bonds in which IFC committed about $200 0 million. Proceeds from the bonds will be used to expand Bank OCBC NISP’s green nancing, 2014 particularly 2015 green projects, 2016 2017 green 2018 mortgages, 2019 and 2020 increased lending to women entrepreneurs and women-owned small and medium enterprises. | IFC-supported OJK • The Syariah Regulation Business Unitonof Sustainable Bank CIMBFinance Niaga ishas had positive planning impacts to issue on Indonesia’s Indonesia’s rst market and led to corporate an increase green sukuk toin sustainable portfolio nancing nance environmental-related among and SDGs projects. largest banks. Indonesia’s OJK Regulation The issuance on Sustainable of OJK RegulationFinance mandatory became Finance on Sustainable wasfor the largest banks a momentous in Indonesia rst step to shift the (BUKU 4, BUKU 3, and foreign-owned banks) during the rst implementation phase behavior of Indonesian nancial institutions, including banks, non-banks nancial institutions, in 2019 and and has pushed capital marketsustainable portfolio players, to nancing incorporate in thesepractices sustainable banks. The regulation in their requires business banksIn operations. toits report rst phasesustainable their nance implementation of implementation, the largest banksthrough a sustainability are required to comply report, including with the their regulation funding 2019, of by sustainable business activities. while the remaining Seventeen banks nancial institutions reported are expected to$81 billion comply by in sustainable 2024. OJK also portfolio developed nancing in their 2019 sustainability/annual report, which shows a 139% increase technical guidelines to help the capital market and non-bank institutions implement sustainable from 2017. P in their respective Snance principles F industries. OJK, with IFC’s assistance, will create a more comprehensive BUKU , BUKUsustainableF nance framework, B such as green taxonomy, 81 and will continuously promote - awareness through capacity building programs. ( ) 33.9 35.9 2017 2018 2019 12 B The IFC ESG Advisory for Asia Pacific is a key part of our ambition to broaden IFC’s influence and deepen its impact in moving the private sector in emerging markets towards sustainability. Our program in Indonesia focuses on integrated ESG support and o ers tailored advice and guidance to clients (public and private sector) in the Kate M Lazarus areas of increasing board e ectiveness, improving the control environment, and family Regional Lead for ESG Advisory business governance, as well as to financial institutions to improve their environmental and social performance and sustainability. Our advisory services also klazarus@ifc.org help support ESG improvements and reform e orts in emerging markets, while leveraging and integrating knowledge tools, expertise, and networks at the global and regional levels. The program in Indonesia is implemented in partnership with Leyal Savas Switzerland’s State Secretariat for Economic A airs (SECO) and UK Climate Change Senior ESG O cer Unit (UK CCU). lsavas@ifc.org Rahajeng Pratiwi ESG O cer rpratiwi@ifc.org The Financial Services Authority (OJK) has a vision to become a trustworthy monitoring institution that oversees the financial services industry, to protect the interests of consumers and the public, and to help the financial services industry become a pillar of the national economy by promoting global competitiveness as well ifc.org/sustainability public prosperity.