Lack of ESG compliance likely to cost Indonesia investment prospects: Analysts

The Jakarta Post

21 March 2023

Indonesia is expected to miss out on potential investment in the downstream mining sector if no significant effort is made to enforce the implementation of environmental, social and governance (ESG) principles, an expert has warned.

A global push to meet the country's energy transition and net zero targets has zeroed in on pushing electric vehicle (EV) adoption, but experts have questioned whether there is enough of a focus on ESG in the development of Indonesia's downstream nickel industries.

As they seek opportunities in a global EV market estimated to reach a size of US$1.318 trillion by 2028, according to market intelligence provider Fortune Business Insights, mining companies face the challenge of balancing a significant ramp-up in the production of critical minerals with the need for sustainable mining practices in line with ESG principles.

Hendri Yulius Wijaya, a senior ESG risk assurance manager at consultancy PwC Indonesia, said an ESG focus was now a business imperative rather than only a matter of compliance with regulations, but various research reports and expert analyses had highlighted inconsistency in ESG implementation across Indonesia's mining industry, which was why a government policy to enhance sustainability reporting was critical.

"Considering the recent findings, we can assume that concerns around ESG implementation in Indonesia's mining industry affect [business decisions to invest in and work in the country]. Any noncompliance can easily threaten investment and operation plans," he told The Jakarta Post on Monday.

The challenge in developing the EV industry as a form of nickel downstream industrialization was the need for nickel smelters, including facilities that use a lot of energy to process low-grade nickel ore, an industry fraught with ESG risks, researchers said.

A case in point is Paris-based hedge fund Hedonova, which on Feb. 16 sold its 76 percent stake in foreign-owned PT Hengjaya Mineralindo's Mineralindo Morowali nickel mine in Morowali, Central Sulawesi. While the fund says it is still bullish on Indonesia's mining industry, it cited sustainability concerns as the driving force behind its departure.

"The cost of disposing of acidic waste from the nickel-extraction process and running a world-class ESG-compliant mine is no longer [compatible], especially while competing with abundant Chinese capital and the willingness to cut corners," Suman Bannerjee, the chief investment officer at Hedonova, told FDI Intelligence on Feb. 28.

The hedge fund sold its share for $31 million in an all-cash transaction to a consortium of Chinese mining companies called the Indo-Pacific Net-Zero Battery Materials Consortium (INBC).

Bannerjee said Hedonova had struggled to find alternative potential buyers in a market dominated by Chinese firms, but he added that the transaction had generated a 300 percent profit for his firm, FDI Intelligence reported.

On the other hand, in the mining of tin, another base metal for which demand is expected to spike on the rise of EVs because of its use as an electric contact material, traceability issues have stifled technology giant Apple's interest in building a factory in Indonesia.

"In 2016, Apple said it was interested in establishing a factory here, but [it said] we should tackle the issue of illegal mining here, because if it went unattended, it would significantly affect the downstream industry," Septian Hario Seto, a senior official at the Office of the Coordinating Maritime Affairs and Investment Minister, told CNBC Indonesia on Feb. 23.

Fitrian Adriansyah, a green investment practitioner and former chairman of the Netherlands-based global foundation Sustainable Trade Initiative (IDH), noted that, at the global level, mining companies with high ESG compliance ratings had far outperformed their competitors, especially when the COVID-19 pandemic hit, providing "returns" of at least 34 percent for shareholders, 10 percentage points more than the general market index in the last three years.

"It seems that many companies already know about ESG, but some may only see ESG as a point on a checklist and fail to fully implement it or comply with it," he told the Post on Monday.

ESG components that continued to be flagged in Indonesia's mining sector, both domestically and outside the country, include compliance with human rights as well as compliance with environmental management, Fitrian explained.

"Large-scale mining companies are, of course, also asked by their shareholders and investors to continue to and strengthen compliance with ESG. Thus, many mining companies today are trying to strategically transform toward a greener approach, including [with regard to] land rehabilitation and afforestation, pollution reduction and mitigation," he said.

(Divya Karyza)