ESG in Indonesia: Legal Aspects of Green Bonds in Indonesia
In recent years, discussions on the environment, growing social divisions, and climate change have become increasingly important in Indonesia. To address such discussions, one of the initiatives taken by the Indonesian Government to support the economic growth and sustainable development is by issuing the Long-Term Development Plan (Rencana Pembangunan Jangka Panjang or “RPJP”) for the period of 2005-2025, which in turn, becomes the basis for the Sustainable Finance Roadmap Phase I (2015-2019) created by the Financial Services Authority (Otoritas Jasa Keuangan or “OJK”).
One of the “products” of the roadmap that supports sustainable development of the national economy is prioritizing the harmony and synergy of the economic, social, and environmental aspects stipulated under OJK Regulation Number 60/POJK.04/2017 on Issuances and Requirements of Green Bonds (“OJK Regulation 60/2017”).
In connection to the above, please find below, our summary of the key points of OJK Regulation 60/2017.
Definitions
A green bond is debt financing, similar to a normal type of bonds. However, funds raised through the issuance of green bonds should be specifically utilized for green projects, assets, or business activities.
As stipulated under Article 1 Paragraph 2 of OJK Regulation 60/2017, green bonds are defined as “debt securities, which funds of the proceeds should be used to finance or refinance business activities that partially or fully concern the environmental sustainability”.
Business Activities that Concern Environmental Sustainability (“BAES”) are those, which main objective is to protect and improve and/or increase the quality and function of the environment.
(Article 1 (3) of OJK Regulation 60/2017)
In addition to the above, Article 4 OJK Regulation 60/2017 stipulates that only 11 (eleven) business activities or sectors can be financed by the issuance of the green bonds, namely:
- renewable energy;
- energy efficiency;
- pollution prevention and control;
- management of biological natural resources and sustainable land use;
- conservation of terrestrial and aquatic biodiversity;
- eco-friendly transportation;
- sustainable water and wastewater management;
- climate change adaptation;
- eco-efficient product;
- construction of environmentally sound buildings fulfilling the recognized standards or certifications; and
- other business activities that are environmentally sound.
(Article 4 of OJK Regulation 60/2017)
Please note that the issuance of a green bonds only can be used to finance or refinance BAES in the form of (i) new businesses and/or activities; (ii) existing businesses and/or activities; or (iii) completed businesses and/or activities.
(Article 3 of OJK Regulation 60/2017)
Requirements of the Issuance of Green Bonds
To issue a green bond, an issuer must be subject to Indonesia’s capital market and other relevant regulations regarding the statement of application and public offering of debt securities (Article 2 of OJK Regulation 60/2017).
To be eligible for issuance of a green bond, the issuer must be assessed by an environmental expert to certify that the business and/or activity is beneficial to protect, improve, and/or increase the quality of the environment.
(Article 5 (1) of OJK Regulation 60/2017)
Required Documentations
In addition to complying with OJK Regulations on Public Offerings of Equity Securities, Debt Securities, and/or sukuk, an issuer of green bonds must prepare other documents, including:
- commitment letter stipulating that the sale of green bonds will be used for BAES;
- verification by the environmental expert declaring other businesses and/or activities underlying the issuance of the green bond; and
- proof of verification of the environmental expert.
(Article 6 of OJK Regulation 60/2017)
Prospectus
In the course of Public Offering of the green bonds, the issuer must provide several additional information to be included on the prospectus:
• a description of BAES funded by the green bond, including (i) the types of BAES; and (ii) the environmental impact(s) of BAES to be achieved;
• the method to identify and mitigate the businesses and social risks in relation to the business activities;
• a summary of assessment results by the environmental expert;
(Article 7 of OJK Regulation 60/2017)
Use of Public Offering Proceeds
As already mentioned, at least 70% of the total money earned from the proceeds through the issuance of a green bond must be used to fund BAES (Article 8 of OJK Regulation 60/2017).
Based on Article 9 of OJK Regulation 60/2017, the issuer can make changes in accordance with OJK Regulation regarding the use of proceeds from the Public Offering.
Applicable Sanctions for Non-Compliance
OJK Regulation 60/2017 also provides sanction for non-compliance with the OJK Regulation. The sanctions are:
- written warnings;
- fines;
- restriction of business activities;
- temporary suspension of business activities;
- suspension of business license;
- withdrawal of consent; and/or
- cancellation of the registration
(Article 19 of OJK Regulation 60/2017)
Concluding Remarks
Considering the purpose of the issuance of OJK Regulation 60/2017 to achieve sustainable economic growth, it is particularly important for any issuer of green bonds to comply with the provisions set out under the OJK Regulation 60/2017. With the raising awareness of sustainable economic development and green economy initiatives by Indonesian business players, we will likely see more bonds issuances in connection with sustainable and environmentally friendly projects.
The article above was prepared by Marshall S. Situmorang (Partner) and Audria Putri (Senior Associate).
