#1Empowered by Indonesia's Sustainable Transformation December 2021 OXFORD BUSINESS GROUP pwc#2ESG in Indonesia: Executive Summary 1 ESG is a top business priority for Indonesia There is a growing incorporation of ESG principles globally, although challenges persist. This was accelerated during the pandemic, with 79% of APAC investors significantly or moderately increasing ESG investments by Q3 2020, according to MSCI research. In Indonesia a leading cause of this shift has been applied pressure from foreign investors. The Indonesian government has been proactive in working to create the conditions and necessary enablers for a smooth transition towards ESG and the UN SDGs, aligned with the country's development agenda. 4 Dedicated financing key for ESG potential Indonesia is among the global pioneers for thematic bonds, and banks are seeking to mobilise private funding under the OJK's Sustainable Finance Roadmap. IDX reporting requirements and OJK Regulation No. 51/POJK.03/2017, as well as Indonesia's confirmed Carbon Tax price and the EU's Carbon Border Adjustment Mechanism, will add further impetus to sustainable business practices and ESG-aligned products and services. Indonesia's sustainable finance environment should provide fertile ground for robust private equity demand and bank participation in the coming years. 2 Harmonised standards will enable reporting While a company's ESG strategy can offer a wide-ranging approach to risk mitigation and value creation, incumbent adoption barriers include balancing ESG with growth targets, a lack of reporting standards and limited support from senior corporate leadership. IFRS Foundation's COP26 commitment to form a new International Sustainability Standards Board should enable more consistent and comparable reporting. Companies must start to identify ESG risks and opportunities now, while this set of core metrics is under development. 5 Indonesia's presence on global stage is growing The 2021 G20 summit and COP26 underlined Indonesia's increasing engagement with the international development agenda: with climate sustainability among the most urgent concerns for the coming decade, Indonesia aims to reach net-zero emissions by 2060 and restated its commitment to halt and reverse deforestation. The country's inaugural G20 Presidency in 2022 will provide a platform for Indonesia to showcase its international leadership – ahead of another opportunity as ASEAN Chair for 2023 - while the emerging market works to address ESG-related challenges at home. - 3 Technology can accelerate ESG achievement Indonesia's digital economy will remain a key driver of inclusive growth in the coming years: with almost three- quarters of the population connected, digital tools can widen access to health care, education and employment. Fintech offers a route to trustworthy access to credit, particularly for unbanked MSMES - which also supports gender equality. The adoption of existing solutions will empower Indonesians across the archipelago, boost productivity and improve socio- economic outcomes. This forms a basis for further innovation to support ESG targets. 6 ESG is a journey and an opportunity Despite incumbent challenges, ESG strategy - from the establishment of good governance to the incorporation of science-based targets - offers opportunities as well as threats. Changes in consumer preferences present the most salient opportunity. In Indonesia businesses will have an opportunity to generate revenue from carbon credits as the price of carbon increases. Digital transformation, sustainable investment and policy reform will catalyse progress towards development goals, strengthen the country's ESG ecosystem and ultimately create shared value for all. PwC OBG ESG Report O OXFORD BUSINESS GROUP 2#3Content Guide 1 Introduction 2: Digital Transformation 3 Investment Landscape 4 4 UN SDGs in Indonesia 5 Growing ESG adoption 6 ESG value creation 7 Indonesia: Economic snapshot 8 Indonesia, G20 and COP26 9 Research partner: PwC 10 PwC thought leaders PwC OBG ESG Report о OXFORD BUSINESS GROUP Climate Sustainability 12 Digital expansion 13 Governance threats 14 Fintech opportunity 15 Health care access 16 Human capital 18 Investment policies 19 Indonesia's carbon tax 20 Sustainable finance 21 Tourism and infrastructure 23 UN SDG commitments 24 ESG adoption gap 25 Towards universal metrics 26 Energy considerations 27 Green technologies 28 Sustainable agribusiness 29 New capital city case study 30 Final word from PwC 3#4Introduction The UN Sustainable Development Goals are aligned with Indonesia's priorities for long-term growth NO 1P 1 POVERTY 2 ZERO HUNGER 3 GOOD HEALTH AND WELL-BEING 4 QUALITY EDUCATION 5 GENDER EQUALITY 6 CLEAN WATER SSS AND SANITATION 7 AFFORDABLE AND CLEAN ENERGY 8 DECENT WORK AND ECONOMIC GROWTH 9 AND INFRASTRUCTURE INDUSTRY, INNOVATION 10 REDUCED INEQUALITIES 11 SUSTAINABLE CITIES AND COMMUNITIES 12 RESPONSIBLE CONSUMPTION AND PRODUCTION QO 13 CLIMATE ACTION 14 LIFE BELOW WATER 15 LIFE ON LAND PEACE, JUSTICE 16 AND STRONG INSTITUTIONS 17 PARTNERSHIPS FOR THE GOALS In 2015 the UN launched 17 integrated Sustainable Development Goals (SDGs) for 2030, designed to end poverty, protect the planet, and enable peace and prosperity 15 years 169 targets 17 goals 247 indicators UN SDGs Indonesia became the 60th member of the UN in 1950, five years after the charter was founded and five years after Indonesia's Proclamation of Independence. In 2015 the organisation's 193 members adopted its 17 SDGs for 2030. With a number of medium- term targets to achieve along the way, these aim to end poverty, improve health and education, reduce inequality and spur economic growth, while simultaneously tackling climate change and working to preserve oceans and forests. Indonesia's planning All 17 of the UN's goals for 2030, as well as 105 of its targets and indicators, have been integrated into successive versions of Indonesia's National Medium - Term Development Plan (RPJMN), which currently spans 2020-24. In April 2020 the UN and Indonesia's government signed the UN Sustainable Development Cooperation Framework 2021-25, aligned with RPJMN 2020-24 and targeting progress towards the UN's 2030 goals. Amid the pandemic ASEAN's largest economy graduated to the status of an upper-middle-income economy in mid-2020, according to the World Bank, with the country pursuing high-income status by 2045. The protracted Covid-19 pandemic threatened this progress, however, complicating efforts to tackle poverty, increase educational attainment and expand access to utilities. Indonesia was downgraded to lower- middle-income status during an annual review in mid-2021: this underscores the relevance and urgency of the UN SDGs. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: UN; World Bank 4#5Introduction Incorporation of ESG principles is on the rise globally, although challenges persist Growing emphasis on ESG • • Environmental, social and governance (ESG) principles are closely aligned with the UN SDGs There is a growing incorporation of ESG into investment analysis, corporate strategy and decision- making amid widespread socio-economic challenges and renewed environmental commitments ESG risk analysis and mitigation can provide a buffer against external headwinds, including market volatility, and protect long-term financial performance Challenges of ESG • • • • No one-size-fits-all approach Personalised trajectory: journey typically starts with development and integration of ESG strategy Organisations have varying risk exposure, priorities and opportunities to create shared ESG value Ratings, reporting and benchmarking: what to include and how to measure (see slides 24-25) Balancing E, S and G (see slide 26) Digitalisation, investment and climate - Climate sustainability is among the most pressing concerns for the coming decade, with Indonesia - alongside many other emerging markets – particularly vulnerable to the negative impacts of climate change. Digital transformation and dedicated financing are key to unlocking the full potential of ESG. APAC investors significantly or moderately increased ESG investments in response to Covid-19, September 2020* 0 10 20 30 40 Regulatory compliance Business 60 70 79% 90 50 80 100 *as per an MSCI 2021 global institutional investor survey ethics Corruption & instability Governance Environmenta Transparency Social Human capital development Carbon emissions Biodiversity & land use Climate change vulnerability Renewable energy Responsible investment Inclusion W & diversity Access to health care Access to socio- economic opportunity Incumbent challenges ESG is increasingly recognised as a strategy for risk mitigation and value creation. This was accelerated during the Covid-19 period: 79% of APAC investors reported significantly or moderately increasing ESG investments in response to the pandemic by the third quarter of 2020, according to MSCI. Nonetheless, a number of challenges remain. Key among these, there is no one-size-fits all approach: ESG risk exposure varies by organisation, as well as by market and industry. Within emerging markets in particular, it is paramount to balance environmental, social and governance concerns - adding another layer of complexity. Digital transformation and dedicated financing remain key for progress. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: MSCI 50#6Introduction A company's ESG strategy can offer a wide-ranging approach to risk mitigation and value creation • • Less ambitious: value preservation if organisations... Identify value-linked ESG factors and perform rapid remediation Review operations and value chain for exposure, and develop and implement risk-mitigation plans Define targets, key performance indicators and a roadmap to drive ESG performance Communicate relative ESG performance and resilience to key stakeholders Business as usual: value erosion owing to... Progress on ESG issues by peers • Changing consumer, employee and investor expectations Increasing regulation Organisation's value Value levers • More ambitious: value creation if organisations... Align value proposition with ESG through review of vision and mission • Re-evaluate business model and revenue streams, and • identify possible transformation strategies that incorporate ESG risks and opportunities Develop a comprehensive public relations and communications strategy for consumer base and broader public Take steps to avoid so-called greenwashing by ensuring that reported ESG progress and targets are matched by actions | M Value erosion from failure to transition Value preservation through ESG Value creation through sustainable transformation performance improvement Value before organisations transition Customer switching Increased regulatory costs Value after ESG review & Proactive Climate competitors transition remediation impact resilience Value after ESG Strategic realignment mitigation measures improvement New products or service offerings Brand value & Value after multiple sustainable transformation enhancement transformation Value opportunities ESG action is increasingly important for value preservation. Key drivers include ESG progress by peers; changing consumer, employee and investor expectations; and new regulations. Targeted ESG improvement can enable value preservation: early steps comprise the identification of value-linked ESG factors, the review of operations and value chains for exposure to climate change, social unrest and poor corporate governance, and subsequent risk mitigation. ESG-led investment and the sustainable transformation of business models and existing assets can unlock value creation. This encompasses an ESG-aligned vision and mission; transformation of business models and revenue streams; and an ESG strategy for consumers and the broader public. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: PwC CO 6#7Introduction Despite Covid-19 challenges, South-east Asia's only G20 economy is expected to recover from 2021 onwards Indonesia posted annual pre-pandemic growth of around 5%, with a rebound expected from 2021* Real GDP value ($ bn) 1500 1200 900 600 300 0 -300 -600 2015 2016 ཡ 2017 • Real GDP growth (% change) 10 8 6 4 2 0 -2 -4 2018 2019 2020 2021F 2022F 2023F 2024F 2025F *October 2021 IMF forecast Indonesian government's focus areas for 2022: • Control Covid-19 transmission while prioritising health sector • Maintain social protection programmes for the vulnerable Strengthen fiscal decentralisation for inter-regional equality Implement zero-based budgeting to: encourage more efficient spending, strengthen synergies among central and regional governments, focus on priority and results- based programmes, and hedge against uncertainty Total population, 2015-26F (m) 2016 2017 2018 20.7% 2019 2020 2022F 13.2% 2024F 2026F 7.8% . 12.7% 0 100 200 300 Other 10.8% • Refine agenda to develop competitive human capital Continue infrastructure development and technological adaptation Contribution to GDP by sector, Q1 2019 Manufacturing Wholesale & retail Trade Agriculture, forestry & fishing Construction Mining & quarrying 35.5% 4.6% growth Growth potential Indonesia enjoyed annual GDP growth of around 5% over 2015- 19, on the back of robust domestic consumption, and ongoing efforts to reform policy and simplify investment procedures under President Jokowi. This trajectory was halted by Covid- 19-related pressures during 2020, with a 2.1% contraction for the year. Nevertheless, the IMF's latest forecast from October 2021 suggests 2021 GDP will exceed the 2018 figure, to be followed by 5.8% growth in 2022. President Jokowi has placed human capital development at the forefront of his second-term agenda for 2019-24. Alongside accelerated digital transformation from 2020, this should help the sizeable, expanding population unlock productivity-driven growth in key economic sectors. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: Bl; Bloomberg; IMF; World Bank 7#8Introduction Ahead of the G20 Presidency, Indonesia is increasingly aligned and engaged with international developments APEC 2021 The three priorities of Asia-Pacific Economic Cooperation (APEC) 2021, hosted virtually by New Zealand, were: innovation and digitally enabled recovery; increasing inclusion and sustainability; and economic and trade policies to strengthen recovery. These align with Indonesia's long-term development aims: priority groups include SMEs, women, young people and rural areas. G20, 2021-22 At end-October 2021 the G20 committed to net zero by mid-century and agreed to phase out coal power and fossil fuel subsidies - without a definitive timeline. Indonesia is G20 President for 2022. With the theme Recover Together, Recover Stronger, overarching priorities encompass inclusion and a sustainable, green economy. Focus areas: digital transformation; inclusive economic growth; health diplomacy, particularly with respect to Covid-19 vaccines; strengthening productivity; and sustainable finance. Indonesia will chair ASEAN in 2023. During G20 and COP26 President Jokowi held bilateral meetings with a number of leaders, including US President Joe Biden, UK Prime Minister Boris Johnson, France's President Emmanuel Macron, India's Prime Minister Narendra Modi and Turkey's President Recep Tayyip Erdoğan. Commitments at COP26 Glasgow Leaders' Declaration on Forest and Land Use: Indonesia among the 100+ pledges to halt and reverse deforestation and land degradation. • President Jokowi on COP26 stage Indonesia's president attended the 26th UN Climate Change Conference (COP26) in Glasgow in November 2021. Takeaways from President Jokowi's speech: Indonesia's forestry sector on track to become net sink by 2030 amid slower deforestation and mangrove rehabilitation Energy sector progress includes: electric vehicle ecosystem development; construction of South-east Asia's largest solar power plant; and use of new and renewable energy, including biofuel Indonesia to continue mobilising climate finance and innovative financing, such as hybrid financing, green bonds and green sukuk (Islamic bonds) Climate finance and technology transfer from developed nations will be key to help Indonesia meet the UN SDGs, including climate goals Indonesia confirmed that its target to phase out coal has been brought forwards from 2055 to 2040, in partnership with the Asian Development Bank and the Philippines - and a separate partnership with Climate Investment Fund. • The country also committed to the Global Coal to Clean Power Transition Statement, noting it will consider accelerating coal phase-out into the 2040s, conditional on additional international financial and technical assistance. 2021 progress The year saw Indonesia strengthen its position on the global socio-economic stage, laying the foundation for its 2022 G20 Presidency and role as 2023 ASEAN Chair. President Jokowi received the G20 Presidency baton in October after the group committed to net zero by mid-century, and agreed to phase out coal power and fossil fuel subsidies. President Jokowi's speech at COP26 the following week spotlighted Indonesian efforts to slow deforestation and promote mangrove rehabilitation, plans to continue mobilising climate finance and innovative financing, and progress towards the transition. The country's G20 Presidency theme, Recover Together, Recover Stronger, seeks to accelerate international progress towards ESG-related goals. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: APEC; Setkab 8#9Introduction . . Research partner: Oxford Business Group PwC's research partner for this publication, Oxford Business Group (OBG), is a global research and advisory company with presence in over 30 countries and is recognised internationally as a distinctive and respected provider of on-the-ground intelligence on world's fastest-growing markets. Strategy & transformation CASE STUDY: Food & beverages ESG strategy, roadmap, governance and reporting PwC developed a corporate sustainability framework to help drive implementation of sustainability across the organisation Created materiality matrix through workshops with board of directors, senior management and 11 group divisions • Formed five-year sustainability roadmap for corporate and business divisions Helped develop first sustainability report in accordance with Global Reporting Initiative (GRI) G4 guidelines Climate Operations × Disclosure CASE STUDY: Timber SDG impact measurement and reporting PwC developed materiality assessment, including online survey for stakeholder engagement Completed gap analysis and defined key performance indicators and targets using GRI Standards Prepared data templates and trained operational team Assisted with data collection, drafting of report and identification of GRI Standards indicators corresponding to material factors Finance CASE STUDY: Ministry of Finance Green sukuk sustainability assurance PwC provided limited assurance services to support the process and also selected information provided by the Ministry for the 2019 Green Sukuk - Allocation and Impact Report Government's first Islamic green debt instrument, deployed to target five key areas: renewable energy, energy efficiency, disaster risk reduction, waste to energy and sustainable transport In 2020 PwC made a science- based commitment to reach net-zero GHG emissions globally by 2030, including in Indonesia Halve emissions Switch to 100% renewable electricity in all PwC firms worldwide Drive energy efficiency improvements in all offices Reshape client service model to balance remote and on-site work Engage with suppliers to tackle their climate impact Reduce air travel, which accounts for 85% of PwC emissions Work with clients Advance non-financial reporting so stakeholders understand organisation's climate impact Embed implications of ESG factors into work for clients Public policy discussions Advance thinking on structural reforms across economies PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: PwC 9#10Eddy Rintis, Territory Senior Partner, PwC Indonesia Why does Indonesia present an appealing responsible investment opportunity? With the fourth-largest population globally and a 67% labour force participation rate, Indonesia is expected to continue to attract investment across industries. Given its abundant forests and biodiversity, and large mineral and agriculture industries, Indonesia has an opportunity to play a leading role in the global carbon- trading market. Renewable energy and low-carbon development have already begun to shape Indonesia's energy transition. Programmes focused on social development will be a key driver of improved livelihoods and economic growth. In which ways can organisations leverage technology for ESG-related goals? Technology can play a critical role in helping organisations achieve their ESG ambitions. Once a company determines its ESG goals, the identification of related data points will require new data-collection methods. - Companies can leverage various technologies - such as geospatial planning, satellite imagery and unmanned aerial vehicles – to generate reliable, verifiable and real-time data for analysis and monitoring. Data analytics can process a high volume of statistics to provide more reliable and useful information. Moreover, as companies determine their emissions-reduction or net-zero targets, they will need tools that can calculate and monitor their emissions. Melli Darsa, Legal Senior Partner, PwC Indonesia How are corporate attitudes towards ESG evolving in Indonesia? The shift towards ESG in Indonesia has been more abrupt than the shift witnessed in many developed economies. The transition in developed markets has been directly linked to investor sentiment, with ESG indices outperforming non-ESG indices. The primary catalyst in the country has been applied pressure from foreign investors. The Indonesian government has been proactive in working to create the conditions and necessary enablers for a smooth transition to ESG adherence. However, there remains more to be done in terms of nurturing supportive policy at the national level, and aligning the country with ASEAN and G20 objectives. What will be the impact of Indonesia's carbon tax? Indonesia's carbon tax scheme, launched in October 2021, will initially impact energy suppliers before extending to other industries. As we head towards the end of 2021, there remain a number of uncertainties surrounding the provisions of the final scheme. The government is discussing a cap-and-tax and cap-and-trade framework, wherein companies will have a cap on their emissions allowance and any emissions in excess of the cap will be taxed at Rp30,000 per tonne of CO2, or they will have the option of trading excess emissions with another plant with a carbon allowance surplus. The government may cut the emissions allowance and increase the carbon price over time. "Technology can play a critical role in helping organisations achieve their ESG ambitions" PwC OBG ESG Report OXFORD BUSINESS GROUP 10 10#11Сс انان Digital Transformation#1273.7% Fixed-line penetration: 3 per 100 persons Digital Transformation Indonesia's digital economy will remain a key driver of inclusive growth in the coming years With a large, consumption-driven domestic market and accelerated digitalisation during 2020-21, Indonesia's burgeoning digital economy looks set to drive growth and enable inclusive development in the coming years. Fintech, telemedicine and education tools are among the standout opportunities. Widening internet access will be key to unlocking this potential. Value of Indonesia's digital economy looks set to triple, 2020-25F* Gross merchandise value ($ bn) The country's smartphone penetration has outpaced the global average, 2017-21E % OF POPULATION 100 - Indonesia World 80 60 40 2017 2018 2019 2020 2021E Indonesia's internet connectivity varies by region, Q2 2020 11% CAGR 25% CAGR 124 Direction of change in share of total users (y-o-y) % of total internet users 40 44 100 2019 2020E 2025F *Nov 2020 report by Google, Temasek and Bain & Company 75 Internet penetration in Indonesia, 2020 Internet penetration globally, 2021 50 Internet users* Rest of population Mobile-cellular penetration: 122 per 100 persons 26.3% 40% 25 II Population (m) 200 150 100 50 Digital expansion Internet access in Indonesia has improved substantially over the last decade: almost three-quarters of Indonesians were connected in 2020, far above the global average of 60%. Internet connectivity in remote areas remains difficult, though there is optimism that increasing smartphone penetration can help leapfrog this challenge. The Covid-19 pandemic accelerated Indonesia's digitalisation as consumers, businesses and governments turned to digital solutions to accomplish everyday tasks. Forecast to almost triple in value between 2020 and 2025 and with sizeable opportunities yet to be unlocked in remote areas, Indonesia's burgeoning digital economy looks set to remain a key growth driver in 2022 and beyond. PwC OBG ESG Report O OXFORD BUSINESS GROUP *all users, including fixed wireless & mobile broadband 60% 0 JAVA SUMATRA SULAWESI KALIMANTAN BALI AND NUSSA TENGGARA Sources: Brodynt; Google, Temasek and Bain & Company; Statista; UN; World Bank MALUKU & PAPUA 12#13Digital Transformation Widening digitalisation requires good governance to combat threats and instil trust The number of cyberattacks in Indonesia almost doubled from 2019 to 2020 CYBERATTACKS (M) 500 400 300 200 100 2018 2019 2020 Most commonly detected threats in Indonesia, 2019 Crypto-mining Draft Law on Cybersecurity and Resilience · · Legislation first proposed in 2019 and still under parliamentary deliberation, alongside the Personal Data Protection Bill, as of the fourth quarter of 2021. Proposed provisions: It will be illegal to collect consumer data without permission Requires businesses to alert customers within days of knowledge of a security breach Includes fines of up to Rp210bn for non-compliant businesses, and up to seven years in prison for individuals There is hope that the new legislation will improve consumer trust and therefore encourage adoption of digital technologies. Indonesian companies were more likely to increase cybersecurity spending than regional peers in 2019-20* Increase Decrease Remain the same PHILIPPINES THAILAND Mobile banking trojans SINGAPORE INDONESIA 0 20 40 60 80 100 RELATIVE CHANGE IN COMPANY CYBERSECURITY BUDGETS (% OF SURVEY RESPONDENTS) Mobile ransomware →> Key opportunities to increase consumer trust Mitigating threats The rapid developments of digitalisation comes hand in hand with threats to digital security: this was clear in 2020, when the unprecedented pace of digital expansion saw the number of cyberattacks in Indonesia almost double. The theft of personal information, including banking details, from smartphones is among the most prevalent cybersecurity threats in the country. Even prior to the pandemic, Indonesia's public and private sectors had committed to improving cybersecurity to build trust in digital services: over 80% of Indonesian companies surveyed in February 2020 had increased cybersecurity spending over the previous year, while the public sector planned to issue cybersecurity legislation in 2021. PwC OBG ESG Report O OXFORD BUSINESS GROUP *survey conducted by Palo Alto Networks in February 2020 across small, medium and large companies active in a variety of dijferent industry sectors (400 respondents, 17% C-suite and 83% ICT) Sources: Indonesia's National Cyber and Crypto Agency (BSSN); Palo Alto Networks 13#14Digital Transformation Fintech offers a route to trustworthy access to credit, particularly for unbanked MSMEs Financial services authority (OJK) regulations to boost the national fintech ecosystem, 2016-18 P2P lending OJK Regulation No. 77/POJK.01/2016 MSMEs must be at least 15% Indonesian-owned, obtain a licence from the OJK and acquire credit guarantees from insurance firms Regulatory sandbox OJK Regulation No. 13/POJK.02/2018 Requires fintechs to undergo a one-year sandboxing period, extendible up to six months, under OJK supervision ICT-based stock crowdfunding OJK Regulation No. 37/POJK.04/2018 MSMEs can raise funds from retail investors through equity crowdfunding using online platforms Indonesia's MSMEs offer considerable growth opportunities for financial services Economic and financial relevance of MSMEs (% of total) Updated by Bank Indonesia (BI) in April 2021 with regulatory sandbox 2.0, which comprises an innovation lab, engineered to test new payment innovations; an industrial sandbox, to promote existing innovation; and a regulatory sandbox for innovation in payment policies. Peer-to-peer (P2P) lending and payment providers dominate Indonesia's fintech market, April 2020 P2P lending Others 20 Payment Digital finance innovation Wealth management ୮ Г. ୮ ୮ 44% 18% 516% 54% 40 60 80 18% 364 fintech players 100 Digital banking transactions in Indonesia accounted for around 83% of total transactions by number as of end-December 2020: 16% were performed at ATMs and 1% at branches. Indonesia's MSMEs in numbers 116.7m workers as of 2017 Rp1086.5trn in loans The number of P2P lending fintech and borrowers has soared since OJK issued Regulation (POJK) No. 77/POJK.01/2016 20,000,000 Lenders Borrowers 15,000,000 100% Workforce at 80% as of June 2018 MSMEs 60% 14.3m bank accounts as Outstanding credit 40% of September 2017 accessed by 20% MSMEs 51% of small enterprises and 34% 10,000,000 MSMEs with of medium-sized enterprises are owned by women a bank account 9.1% of GDP contributed by female-owned SMEs 5,000,000 Access and trust Bank Indonesia took steps to expand digital financial inclusion during the pandemic, including strengthened collaboration with fintech players. Indonesia's fintech ecosystem comprised 364 players as of April 2020. Primarily providing P2P lending and payment solutions, these could be key in facilitating access to credit for MSMEs. MSMEs account for the vast majority of employment - with around half of small enterprises owned by women - and yet they remain overwhelmingly unbanked. The OJK aims to build trust in the fintech ecosystem: with respect to wider and safer access to finance for MSMEs, regulations include transparency in P2P lending and a sandbox to nurture innovation. PwC OBG ESG Report о OXFORD BUSINESS GROUP 0 2016 2017 2018 2019 Sources: BCA; BI; Google, Temasek and Bain & Company; ICLG; IFC; McKinsey; OJK; PwC 14#15Digital Transformation Rapid expansion of telemedicine is widening access to health care and could fuel growth Indonesian government's health budget has more than tripled, 2016-20 RP TRN 250 212.5 200 113.2 150 109.2 92.2 100 65.9 50 0 2016 2017 2018 2019 2020 Health budget rising amid efforts to expand the Universal Health Care initiative launched in 2014, targeting full coverage by 2019 - yet to be reached before pandemic- related disruption Indonesia's health care resources were near the average for lower-middle and low-income countries, 2017 Indonesia NURSES PER 1000 POPULATION Lower-middle & low-income HOSPITAL BEDS PER 1 1000 POPULATION 1 1000 POPULATION DOCTORS PER 0.4 0.6 Digital tools can help address stunting, a notable health concern • 27.7% of Indonesian children under the age of five were stunted - with impaired growth or development due to chronic malnutrition or repeated infections in early life - in 2019 National Strategy to Accelerate Stunting Prevention Programme 2018-24 is a $3.9bn package to address the issue. Includes awareness, behaviour change, parenting and caring practices. 1.5 Inequalities in health access by locality 1.3 pose a barrier to development, 2018 WANTUAL Hospital beds inclusive per 1000 population Riau ebdw TUGAS SAVA PEMETAAN DIAGNOSTIK 0.98 West Java 0.85 REMBUK LAPORAN West Nusa Tenggara 0.71 4 ㅁ 0.0 0.3 0.6 0.9 1.2 1.5 To strengthen frontline nutrition spending and collaboration, development workers are equipped with digital solutions to enhance workflow, support community empowerment and improve social accountability. App features includes village mapping for supply-side readiness; social mapping. to register priority households; risk-based task management; and reporting. Government implemented the PeduliLindungi application as part of its long-term pandemic strategy National digital Covid-19 contact-tracing . ● • system, using mobile location data Notification upon entry to a red zone with confirmed or suspected Covid-19 cases Access to health checks and consultations Since October 2021 domestic air passengers are required to show proof of at least one administered Covid-19 vaccine on the app Good employee health facilitates socio-economic well-being Social well-being & wealth Good employee & prosperity Economic development health Productivity at work Business competitiveness Real world impact Digital tools offer substantial potential to widen health care access in Indonesia's rural areas. The number of active users of some of the country's most popular telemedicine services increased by around 70% during the pandemic. As underlined by the World Health Organisation, improved health can enhance individual productivity, boost national competitiveness and ultimately raise socio-economic well- being. Mobile applications are not only used to curb the spread of Covid-19, but could also help prevent non-communicable diseases by streamlining the workflow of development workers. This may help address stunting, which affected more than one in four children the year before the pandemic. PwC OBG ESG Report O OXFORD BUSINESS GROUP Relationship between public health and productivity Sources: MoH; OECD; Statista; WHO; World Bank 15#16RP TRN • Digital Transformation Digital tools can widen access to education, employment and skills development Indonesia's budget for education increased by 29% in 2016-22 600 500 400 300 200 100 0 2016 2017 2018 2019 Digital tools offer wide-ranging value for human capital development Finding, attracting and retaining talent is among the greatest challenges for global human resources leaders, according to PwC's 2020 Human Resources Technology Survey Developing people to reach their full potential is another widespread challenge for companies Digital tools can drive productivity, innovation and growth, but require upskilling at all levels Upskilling amid automation widens access to high-skilled, value-added socio-economic opportunities 2020 Technological innovations help widen access to Indonesia's labour market 2021 2022 Labour market information system, Sistem Informasi Pasar Kerja, developed by the Ministry of Manpower 539,730 Registered jobseekers 485,212 job vacancies Online registration of individual jobseekers and firms, 2018 data Access to education varies by locality 70% secondary enrolment in East Nussa Tenggara, Sulawesi and West Papua in 2019 16% of Indonesians received tertiary education, compared to G20 average of 38%, in 2017 Government aims to increase the number of vocational training Pre-pandemic 300 centres 2024 500 President Jokowi's Pre-Employment Card Programme leveraged technology to help laid-off workers, 2020 Rp20trn 5.6m participants Certified digital skills training to widen socio-economic opportunities 85% secondary enrolment in Aceh and Bali in 2019 57% secondary enrolment in Papua The pandemic brought edtech investments to Indonesia but penetration remains a challenge Edtech is concentrated in Jakarta, where 55% of firms operate 57% of students are unaware of government-provided Rumah Belajar platform Social media and conferencing apps are more popular than edtech for digital learning Labour evolution Human capital development remains among President Jokowi's policy priorities. This will be essential for the country to meet future labour market demands and achieve high-income status. Indonesia's Human Capital Index score rose marginally from 0.53 in 2018 to 0.54 in 2020, according to the World Bank. This means that a child born in Indonesia will be only 54% as productive as they could be with complete education and full health. Inequalities based on household income remain a serious challenge. Digital tools can help address this, expanding the reach of the labour market, offering skills development and supporting Indonesia's transition towards a knowledge-based economy. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: Cabinet Secretariat; OECD; PwC, Statista; UNESCO; UNICEF, World Bank 16 16#17Investment Landscape#18Investment Landscape Regulatory changes have been introduced to strengthen sustainable investment landscape The OJK has raised ESG requirements for financial services players and listed companies Indonesia's financial services providers have been required to submit either a sustainability report or a sustainable finance action plan (RAKB) since 2019, and all other issuers and public companies have been required to do so from 2020 - as per OJK Regulation (POJK) No. 51/POJK.03/2017. Technical Guidelines for Banks for the Implementation of OJK Regulation No. 51/POJK.03/2017 on sustainable finance IDX's ESG leaders outperformed their peers, February 4, 2014 - January 29, 2021 Released in 2018 by the OJK OK IDX 37.3% Indonesia Stock Exchange (IDX) ESG Leaders, index comprised 30 constituents (as of January 2021) from IDX80 with low ESG risk rating % 34.7% 25.5% IDX Composite (IHSG) LQ45, index of 45 most heavily traded stocks Improving investment 80 ecosystem & business activity 60 MSMEs & cooperatives 40 Other 20 Omnibus Law on Job Creation aims to improve ease of doing business and attract investment Enacted in November 2020. Aimed at reducing red tape in business and labour laws, which were viewed as unnecessarily complex. Amends some 78 laws and consists of 15 chapters. Breakdown of substantive articles amended by Omnibus Law on Job Creation (by focus) Government investment & national strategic projects Generally welcomed by the business community: optimism that a more agile labour market and reduced red tape will attract investment and facilitate socio-economic growth. However, amid concerns the legislation undermines worker rights and weakens environmental protections, in end-December 2021 the Constitutional Court ordered the government to amend parts of the law within two years. Land procurement • Classify 12 sustainable business activities to help banks improve their sustainable portfolio financing Elaborate on Sustainability Report/RAKB Among them: • Renewable energy Sustainable water and wastewater management Environmentally friendly transportation Environmentally sound buildings Investment business list was designed to welcome increased foreign investment - Presidential Regulation No. 10/2021, as amended by Presidential Regulation No. 49/2021, introduced an investment business list – sometimes referred to as a positive investment list. Effective March 2021, this replaced a so-called negative investment list of segments closed to foreign ownership. Listed business lines are open for 100% foreign investment; investors can enjoy tax facilities in the form of tax holidays, tax allowances or investment allowances. Includes additional provisions to favour MSMEs. Sectors with notable foreign investment growth potential, according to the Ministry of Investment/Indonesia Investment Coordinating Board (BKPM) Manufacturing Infrastructure Digital economy • FMCG Downstream natural resources Government aims to invest Rp430bn in infrastructure projects, in addition to the construction of the new capital (see slide 29), 2020-24 Primarily nickel and other minerals used for batteries Sustainable policies OJK Regulation (POJK) No. 51/ POJK.03/2017 raised the ESG requirements for financial services providers and listed companies from 2019 and 2020, respectively. Meanwhile, the bourse's ESG leaders outperformed other indices from early 2017 to early 2021, underlining the potential for ESG to preserve and create value. Despite controversies over the possible loss of workers' rights, the Omnibus Law on Job Creation simplified labour laws. This aimed to create a more attractive investment environment and increase local opportunities. To this end, the introduction of the positive investment list reframed the conversation around foreign investment and opened 245 business lines to wholly foreign investment. PwC OBG ESG Report OXFORD BUSINESS GROUP Sources: ASEAN Briefing; Cekindo; IFC; IDX; Ministry of Investment; OJK; PwC; SSE Initiative 18#19Investment Landscape Indonesia's carbon bill should encourage low-carbon investment and standardise climate impact calculations. Indonesia is the world's largest exporter of palm oil, January 2020-21 Harmonised Tax Law (HPP) introduced a carbon tax in Indonesia, October 7, 2021 Indonesia 10%* Malaysia 34%• Others Oil plantations are key To reducing rural poverty 57% Indonesia exported 29m tonnes of palm oil in 2017 The EU was the second-largest importer of Indonesian palm oil exports in 2018 India EU China Other 49%- 25% - 14% 12% In December 2018 the EU banned palm oil imports for biofuel, arguing that the industry contributes to ASEAN's extensive deforestation. Palm oil imports still permitted for other products, such as food and cosmetics. Indonesia has among the lowest carbon taxes implemented to date Indonesia Singapore Spain France 0 10 In June 2021 the House of Representative proposed a price of $5.20. The Indonesian Chamber of Commerce and Industry (KADIN) argued that a high carbon tax would excessively burden business still recovering from the pandemic. Price was subsequently reduced by 60%. 20 30 $ PER TONNE OF CO₂E WHEN Starting from April 2022 GOALS • • OPPORTUNITY Regulate the carbon trade, which will be limited to the domestic market until national greenhouse gas (GHG) reduction targets are met Provide performance-based payments for reduced GHG emissions Impose a levy on carbon emissions Attract investments for low-carbon enterprises, particularly in energy, transportation and manufacturing Grant Indonesia first-mover advantage over neighbouring countries for sustainable development and exports, and possibly standardise methods to price carbon and account for its impact AMOUNT Rp30,000 per kg (approximated to $2.10 per tonne) of carbon dioxide equivalent (CO₂e) Could potentially ease barriers to EU-Indonesia trade Proposed Carbon Border Adjustment Mechanism could limit trade between Indonesia and the EU Tari proposed in July 2021 for carbon-intensive products imported to the EU. Designed to encourage industry and trading partners to avoid: Carbon leakage from the EU* Emission-heavy imports to the EU 40 50 *redirection of emissions if industries move to non-EU markets with lower environmental standards Given the EU's 2018 ban on palm oil imports for biofuel due to deforestation links, there is an expectation that this may include restrictions on palm oil trade Sustainable trade Indonesia is the largest global exporter of palm oil. The EU historically represented the country's second-largest trade partner for the commodity, but EU imports of palm oil from Asia began to decrease after the bloc's end-2018 ban on biofuel. The July 2021 Carbon Border Adjustment Mechanism and COP26 focus on deforestation may further reduce palm oil imports. On the other side of the coin, the HPP confirmed in October 2021 will introduce one of the region's first carbon taxes from April 2022 to attract low-carbon foreign investment and could reverse this trend. Additionally, standardised carbon accounting will enable an objective financial analysis of business costs and efforts related to GHG emissions reductions. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: ASEAN Briefing; DW; European Commission; MoF; OECD; PwC; Reuters; SpringerOpen; Statista 19#20Investment Landscape Indonesia's evolving sustainable finance ecosystem should provide fertile ground for ESG Indonesia is among the global pioneers in thematic bonds issuance 1st global Sovereign green sukuk 1st global Green retail sukuk 1st Asia SDG-linked bond OJK Regulation No. 60/POJK.04/2017 and related incentives defined issuance of green bonds and helped to raise interest in sustainable finance Sustainability bond to finance green projects, such April 2021 as renewable energy and small businesses $1.25bn February 2018 $300m $104.4m November 2019 $500m Sustainability bond to finance environmental and social projects April 2019 $584m August 2021 Rp3trn First corporate green bond July 2018 OJK's Sustainable Finance Roadmap Phase Il aims to accelerate ESG-related financing, 2021-25 Policy Products Various policies Wide-ranging to support sustainable finance sustainable finance products and services Market Infrastructure Technologies and information infrastructure to support sustainable finance Coordination Improving coordination and exchange of information among ministries and other stakeholders Strengthened portfolio resilience and growing ESG focus create a positive macroeconomic climate for private equity (PE) investments, 2021 South-east Asian PE investors grappled with unprecedented uncertainty in 2020. In 2021 PE leaders took steps to bolster portfolio resilience and minimise the risk of future disruptions. A growing number of PE funds in the region are shifting to sustainable portfolios and focusing on ESG investing. South-east Asia's PE funds invested more than 41% of deal value, equal to $6bn, in sustainability assets* in 2018, according to 2020 Bain & Co research. This compares to 1% in 2010, according to the same analysis. * Investments in a company that meets Bain & Co's sustainability criteria for developing countries • Non-governmental support Supported by research and international institutions to develop sustainable finance initiatives Human resources Structured programmes to build internal and external capacity CASE STUDY: Star Energy Geothermal Group's green bond issuance underlines appetite for Indonesian sustainable finance With installed geothermal capacity of 875MW across three power stations, in October 2020 Star Energy Geothermal Group (SEGG) raised$1.1bn in senior secured green bond financing Collateral-backed debt security with highest priority for repayment, therefore deemed to incur lowest risk Governed by a green bond framework aligned with International Capital Market Association Green Bond Principles as well as ASEAN Green Bond Issuer Bank Mandiri Issuer Bank BRI Issuer Sarana Multi Infrastruktur Awareness Communications strategy for sustainable finance Structure of $1.1bn green bond issuance, October 2020 Co-issued by: Star Energy Geothermal Salak and Star Energy Geothermal Darajat || Tranche A: Standards • Bonds 3.5x oversubscribed despite pandemic-related global headwinds; listed on Singapore Exchange Tranche B: Ratings: $320m; 3.25%; 8.5 years $790m; 4.85%; 18 years Moody's: Baa3; Fitch: "BBB-" Financing growth Indonesia has been a global and regional pioneer for ESG-related bonds issuance, including both sharia- compliant and SDG-related financing. National policies have helped to increase the focus on sustainable finance. Key among these, OJK's regulation No. 60/POJK.04/2017 defined green bonds issuance; the organisation's Sustainable Finance Roadmap Phase II, 2021-25, aims to boost ESG-related funding over the coming years. Regional investors have shown growing appetite for sustainability assets in PE funds, which rose from 1% of PE deal value in 2010 to 41% in 2018. Indonesia has demonstrable potential for ESG-related financing: SEGG's oversubscribed $1.11bn issuance in October 2020 is one example. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: Allen & Overy; Bain & Company; Credit Agricole; Euromoney; OJK; Reuters; SGX; Star Energy Geothermal; UNDP 20 20#21Investment Landscape Sustainable tourism and infrastructure present long-term opportunities • With a contribution of almost 6% to national GDP and around 320m annual visitors prior to the pandemic, Indonesia's tourism industry will remain an important target of investment An upward trend in sustainable tourism prior to the pandemic signalled long-term opportunity Sustainability-driven tourism expansion will translate into higher borrowing capacity and taxation inflows, which can be re-invested to support long-term development of the sector and local communities Domestic and international visits experienced robust growth in 2015-18 Infrastructure will remain a key regional development priority: Master Plan on ASEAN Connectivity 2025 focuses on mobility of people, and efficient logistics and trade routes. Related sectors are important for economic activity; with the Indonesian public sector historically providing half of transport infrastructure funding, transport and telecoms accounted for over one-third of infrastructure-related foreign direct investment (FDI) in 2020. Infrastructure-related sectors contribute 27.4% to GDP in 2020 350 300 250 200 150 100 50 0 2015 2016 2017 319.2m 20 15 Construction 10 Transportation, storage & telecoms 5 Mining Domestic trips (m) Electricity & gas 0 2018 International visitors (m) Other activities Public funds accounted for half of Indonesia's transport infrastructure funding in 2015-19* 10.7% Public Private 19% 9% State-owned 6.4% enterprises 72.7% 31% *according to the second edition of PwC's annual Indonesian infrastructure report 50% Sustainable tourism* Income 2016 $13.6m +59% Since 2011 Total investment, 2015 $11.7m +354% Since 2005 *tourism related to sustainability standards as defined by the Ministry of Tourism Sustainable tourism considers current and future economic, social and environmental impacts Aims Optimal use of environmental resources Respect for socio-cultural authenticity of host communities Viable, long-term economic operation PwC OBG ESG Report OXFORD BUSINESS GROUP Utilities, transport and telecoms accounted for the majority of infrastructure-related FDI in 2019-20 2019 Indonesia has commitment to sustainable tourism development 2020 Law No. 10/2009 on Tourism 0 500 1000 1500 Sustainability must embrace natural, social, economic and cultural ecosystems 2000 $ M 2500 3000 3500 Long-Term National Development Plan (RPJPN) 2005-25 Includes provisions to develop tourism alongside environmental protection Mining Construction Electricity, gas & water supply Transportation, storage & telecoms Indonesia's funding needs for 2020-24 were estimated at Rp6.4trn by Ministry of National Development Planning (BAPPENAS) in 2019. Enhanced transportation and logistics, in line with ASEAN's agenda, will lower costs, improve reliability and access, and potentially enable digital solutions to maximise productivity. Sources: ASEAN; MOT; OECD; Statista; UN WTO; UN SDG; WEF 221 21#22Climate Sustainability#23Climate Sustainability Indonesia's environmental sustainability policies are aligned with the UN SDGs and the Paris Agreement Emissions reduction Indonesia's GHG emissions increased by 44% in 2010-19 800 13 CLIMATE ACTION Co2 emissions M tonnes 600 400 200 0 7 AFFORDABLE AND CLEAN ENERGY 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Energy Efficiency National Energy General Plan (RUEN), 2017-50: Designed to achieve energy independence and energy security RUEN targets, 2025-50 Gas 2025 New & renewable sources Oil Coal 22% 24% 23% 25% 30% 2050 31% Nationally Determined Contribution (NDC), 2016-30: Outlines necessary emissions reductions for Indonesia to meet Paris Agreement* commitments Indonesia's NDC targets : 129% in GHG emissions against a 2030 business-as-usual scenario 41% in GHG emissions with international assistance for finance, technology transfer and capacity-building *international treaty to limit global warming to below 2°C, and preferably to 1.5°C, compared to pre-industrial levels Combatting deforestation 15 LIFE ON LAND • COP 26 Committed to combatting deforestation and achieving net zero in tandem with socio- economic development, at COP26 President Jokowi reiterated the importance of developed markets realising climate-related financial commitments. The ADB launched the Climate Action Catalyst Fund at the conference: this carbon fund aims to mobilise over $100m from the public and private sector for investments aligned with the Paris Agreement and SDGs. Indonesia hosts the world's third-largest tropical rainforest, after Brazil and the Democratic Republic of Congo Global forests sequestered – or captured and stored - around twice as much CO2 as they emitted in 2001-19, representing one of the planet's most important carbon sinks Indonesia reduced annual deforestation by 86% in 2014-19, according to KLHK data M HA 1.2 1.0 0.8 0.6 0.4 0.2 0 25% 20% 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Protection of land use 89% reduction in Indonesian forest fires in 2015-20, from 2.6m ha to below 296,500 ha, according to World Resources Institute Indonesia 2021 commitments Indonesia submitted an Updated NDC, alongside a Long-Term Strategy on Low Carbon and Climate Resilient Development (LTS-LCCR) 2050, to the UN Framework Convention on Climate Change in July 2021. Among others, this outlines 2020-24 milestones towards climate goals and strengthens alignment with long-term economic development. In line with the 2021 G20 commitment, the LTS- LCCR 2050 states that emissions from Indonesia will peak by 2030, before the country secures net-zero emissions by 2060. Committed to combatting deforestation in tandem with economic development, at COP26 President Jokowi reiterated the importance of developed markets realising climate-related financial commitments for emerging market progress. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: ADB; KLHK; Our World in Data; UN; World Bank; WRI 23 23#24Climate Sustainability Reporting complexity contributes to a gap between risk awareness and management Financial returns and employee engagement are among the key benefits of ESG Please indicate how much you agree or disagree with the following statements*: "I am more likely to buy from/work for a company that stands up for..." 84% 80% Environmental Employees Consumers 83% 76% Social 86% 80% Governance *PwC's Consumer Intelligence Series. Survey conducted across the US, Brazil, the UK, Germany and India. (5005 consumer responses and 2510 employee responses collected during March-April 2021). APAC companies may be less prone to greenwashing than those in other regions What do you think about your companies' efforts to promote their ESG credentials relative to their actions?* Make greater ESG efforts than they promote Promote ESG credentials that match their actions Promote better ESG credentials than their actions justify APAC excl. China & japan) Europe, Middle East & Africa/Latam Europe North America 0 20 40 60 80 100 30% of global CEOs report being concerned about climate change, compared to 40% who have factored this into strategic risk-management activities 38% of Indonesia's CEOs report being concerned about climate change, with 22% having factored this into strategic risk management* -38% -30% 22% -40% Indonesian responses align with global trend identified by PwC: results suggest a moderately negative correlation between exposure to natural hazards and companies' preparedness for climate-related risk. * PwC's Global CEO Survey 2021 (5050 global responses collected in January-February 2021) Lack of certainty and complexity around ESG reporting pose adoption barrier Which of the following do you feel are the biggest barriers preventing your company from progressing on ESG issues?* 1st Balancing ESG with growth targets 40% 2nd Lack of reporting standards & regulations/complexity 3rd Lack of attention or support 33% 37% *PwC's Consumer Intelligence Series. Survey conducted across the US, Brazil, the UK, Germany and India. (1257 global executive responses collected during March-April 2021). "Our external challenges primarily concern the lack of clear guidelines for the industry to integrate ESG best practices - particularly within this region's unique context and balanced with economic growth priorities" - Tanah Sullivan, Group Head of Sustainability, GoTo Adoption gap While consumer spending and employee engagement are among the key opportunities for ESG value creation, incumbent adoption barriers on the global level include: balancing ESG with growth targets; a lack of reporting standards and complexity, including regulations; and insufficient attention or support from senior leadership. PwC's Global CEO survey results in 2021 suggest a moderately negative correlation between exposure to natural hazards and companies' preparedness for climate- related risk - mirrored by results for Indonesia. Without one standardised methodology for ESG data collection and reporting, organisations may additionally be wary of promoting better credentials than their actions justify. * Fidelity ESG Analyst Survey 20211 (151 respondents) PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: Fidelity International; PwC 24 24#25Climate Sustainability Harmonised sustainability standards should enable more consistent and comparable reporting ESG ratings agencies measure different environmental elements and criteria change over time, 2008-18 Proportion of the eight ESG rating and information provider agencies that apply each E criterion into evaluation of corporate sustainability* Industry-specific criteria Water use & management Carbon intensity Control of impacts on the overall life-cycle 2008 ---- 2018 100 Climate change 80 Waste management/reduction 60 40 Travel & transport impact 20 Emissions Renewable energy/raw materials Raw material sourcing Protection of biodiversity Pollution management & resources Packaging Materials recycled & reused Eco-design Eco-efficiency Energy consumption/ efficiency Environmental policy/ management Environmental reporting Environmental risk management Hazardous waste *based on analysis of eight ESG rating and information provider agencies, including FTSE Russell ESG Ratings, MSCI ESG Research, REFINITIV and Sustainalytics International collaboration towards universal metrics • PwC collaborated with the World Economic Forum, the International Business Council and other services firms to identify universal metrics for more consistent and comparable reporting • Released in September 2020, these Stakeholder Capitalism Metrics include full implementation of Task Force on Climate-related Financial Disclosures recommendations; broadened to nature-based impact, including biodiversity, with mid-2021 launch of Taskforce on Nature- related Financial Disclosures At COP26, the International Financial Reporting Standards (IFRS) Foundation announced the formation of a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards Overcoming inconsistency The third-party verification of ESG data is important to validate progress. ESG ratings agencies, meanwhile, benchmark performance against industry, regional and global peers. However, agencies assign different weighting to different ESG elements. Moreover, criteria change over time and also vary by industry and market. While the evolution of criteria is necessary to keep pace with broader change, it also impedes comparable reporting. Efforts have been ongoing to address the lack of universal ESG metrics, such as the September 2020 Stakeholder Capitalism Metrics by the WEF and other partners. The IFRS Foundation's COP26 commitment to form the ISSB should further accelerate progress towards this. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: IFRS; MDPI; Sustainability; WEF 25 25#26Climate Sustainability Climate sustainability and socio-economic development must both be considered for Indonesian energy Indonesia's growing population is accompanied by rising. demand for utilities Total population in 2021 276.4m Indonesia's utilisation of renewable energy resources is considerably lower than estimated potential*, 2019 Estimated potential (GW) Utilisation rate (%) Additional forecast population by 2030 22.8m 250 10 Global rank by population, 200 8 2021-30 #4 150 CO 6 National electricity demand had been forecast to triple over 2010-30, driven by robust economic growth, urbanisation and industrialisation as well as population expansion 88.3% 91.2% 95.4% Indonesia is expanding electrification and filling relative disparities in the archipelago 2015 2016 2017 2018 2019 2020 0 20 40 60 80 100 98.3% 98.9% 99.2% 100 50 0 Solar Hydro Wind Bioenergy Geothermal Ocean *OECD calculations based on statistics from the Ministry of Energy and Natural Resources (MEMR) and Perusahaan Listrik Negara (PLN), the state-owned power producer and operator • • • • Non-renewable sources may be needed to support socio-economic development Low renewables usage in Indonesia has been attributed in part to the dominance of coal in the country Many emerging markets are at an energy-intensive stage of development, with access to a ordable electricity fundamental for inclusive growth; growing energy demands need to be met with non-renewable sources such as thermal coal, oil and gas The green premium attached to renewable solutions underscores the importance of balancing socio-economic and environmental considerations in the local context 4 Indonesia's Electricity Power Supply Business Plan (RUPTL) 2021-30 aims to increase the proportion of renewables to at least 50%, up from 30% in RUPTL 2019-28 4 2 0 Sustainable electrification Indonesia's large population is forecast to grow by 22.8m between 2021 and 2030, which will translate into increased demand for electricity. Efforts to widen electrification in Sulawesi, East and West Nusa Tenggara, East Kalimantan, West Sumatra and Yogyakarta, as well as ongoing industrialisation and GDP growth, will also raise demand. It seems unlikely that renewables alone, particularly given underinvestment in the segment, will be sufficient to meet these demands across the archipelago. Non-renewables will therefore remain important for Indonesia's socio-economic development. Within this context, net- zero action from private and public organisations will be key to expanding renewables and minimising emissions. PwC OBG ESG Report OXFORD BUSINESS GROUP Sources: MEMR; Mongabay; OECD; PLN; Statista; World Bank 26 26#27There is considerable scope for green technologies to enhance Indonesia's climate sustainability What is green technology? Green technology provides services while mitigating or reversing the effects of human activity on the environment. For example: Energy Mobility & transport Food, agriculture & land use Heavy industry Built environment • . • • • Production, development and distribution of alternative fuels Measures that support renewable energy, including storage and supply-demand balancing mechanisms, and increase the efficiency of the energy sector and energy-intensive electronics Improvements that increase the efficiency of engines, design or materials associated with transportation, and urban planning and design Development of EVs and micro-mobility vehicles, and related infrastructure, such as ride-sharing apps and charging stations Food production methods that reduce carbon intensity, including substitution of animal products, and low-GHG farming practices Development of new fertilisers with a lower carbon footprint, and processes that reduce GHG emissions levels Reduction of emissions from the manufacturing of large, heavy articles and materials in bulk, and activities to reduce waste • Creation of low-GHG alternatives to traditional inputs such as chemicals, steel and plastics • High-efficiency, fixtures, lighting and heating and cooling systems; smart management of energy consumption using sensors and smart devices Efficient construction methods with an emphasis on easing construction and reducing on-site waste, including modular construction and 3D printing GHG capture and storage Climate and earth data generation Despite being hard hit by climate change, Asia (excl. China) accounts for 3.1% of global venture capital investment in climate-tech start-ups Proportion of total value of venture capital investment in climate tech by region 1.1% 1.5% 3.1% 11.7% 32.9% 0 0.2% 0.2% US & Canada China Europe Asia (excl. China) 49.3% Middle East & North Africa Latin America Australasia Africa Indonesia needs greater annual clean energy investment to meet its 2025 target of 23% renewables Annual clean energy investment ($m) Annual renewable power investment needed to meet 2025 targets (excl. large hydro) Geothermal Bioenergy New & renewable energy* 7000 Energy conservation 6000 5000 4000 3000 2000 1000 0 2015 2017 *includes all renewables aside from geothermal, bioenergy and large hydro 2016 2018 2019 Climate Sustainability Greener solutions Green technologies offer a competitive and sustainable solution to Indonesia's growing demand for utilities and natural resources, and could help address infrastructure challenges. These technologies will facilitate climate mitigation and adaptation, food security and coastal protection. Standout examples include wastewater treatment and waste management technologies, renewable energy and EVs. While these have high up-front costs, they lead to long- term resource savings alongside environmental footprint reduction. There should be scope for the country's buoyant start-up ecosystem to help meet these needs, presenting an opportunity to optimise assets in long-term projects that align with ESG criteria and contribute to long-term development. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: BAPPENAS; Climate Investment Funds; OECD; PwC; US ITA 27#28Climate Sustainability Sustainability advances in agri-business present another emergent opportunity The Roundtable on Sustainable Palm Oil (RSPO), the world's largest non-profit organisation for ethical palm oil production, issues sustainability certifications when palm oil is produced without causing harm to environment or society Principles and criteria for sustainable palm oil production created by the RSPO ✓ Fair working conditions. ✓ Protection of lands and rights for indigenous groups ✓ No clearing of primary forest ✓ Preservation of wildlife on plantations ✓ Lowering of GHG emissions ✓ Decreased industrial pollution Additional ESG-related benefits include reduced use of pesticides, reduction of workplace accidents and enhanced productivity Indonesian Sustainable Palm Oil (ISPO) certification was introduced in 2011 by the Ministry of Agriculture Regulation No.19/Permentan/OT.140/3/2011, and updated by Ministry of Agriculture Decree No. 11/2015 and Decree No. 38/2020. ISPO certification has been mandatory for all producers other than smallholder farmers since 2014; ISPO certification is set to be mandatory for smallholders by 2025 51% of global RSPO-certified palm oil came from Indonesia, and 42% from Malaysia, in 2020 Global RSPO-certified production area has grown considerably M HA 3.5 3.26 3.05 3.0 2.81 2.51 2.5 2.0 1.5 1.0 0.5 0 2017 2018 2019 2020 Indonesia remains committed to transitioning towards biofuel and away from fossil fuels B20 programme mandated 20% palm oil in fuel, so-called biodiesel, for vehicles and heavy machinery from end-2018 2018 B20 Indonesia's biofuel demand is expected to rise to 190m tonnes by 2050, from 28.9m tonnes in 2020 2020 B30 2022 | B40 2025 B50 0 10 20 30 40 50 Plantations still present social and labour challenges Payment below minimum wage Adopted piece-rate pay remuneration system, in which workers are paid for productivity rather than time Concerns around child labour Particularly in areas with limited access to schooling and childcare facilities Exposure to hazardous chemicals Mainly used as pesticides and herbicides in plantations Food insecurity Pest and saltwater intrusions can limit crop yields; expansion of plantations reduces land available for edible crops Palm oil action and COP26 recommitment to end deforestation Palm oil industry plans to ramp up efforts to help smallholder farmers - which account for 6.7m ha, or 75% of the country's total plantations replace old plants with new crops. This is necessary to maintain or raise yields without increasing land use. Challenges for smallholder farmers include potential loss of income during the replanting process; the required use of certified seeds; and adherence to fertilisation and land-clearing practices without burning. Agri-business opportunity The sustainable development of Indonesian agri-business offers benefits for multiple stakeholders, with 51% of global RSPO-certified palm oil produced in Indonesia in 2020. This indicates better protection for indigenous groups, native flora and fauna biodiversity. Plantations are increasingly aiming to be self- sufficient in terms of energy usage, including the use of oil palm shells in boilers and methane gas projects. The move towards biofuel presents another opportunity for local value addition. Sustainability advancements can raise international perceptions of Indonesia, create opportunities for smallholder farmers and reduce reliance on energy imports. More remains to be done to address social and governance-related challenges. PwC OBG ESG Report O OXFORD BUSINESS GROUP Sources: Human Rights Watch; ISPO; Mongbay; RSPO ; WWF 28#29Climate Sustainability Case study: New capital city could offer a model for green, smart and inclusive cities Analysis of business case for Indonesia's planned new capital, using five-case model Five-case model is a project planning methodology developed by the UK government to outline cases for change, supported by the World Bank and the G20 Strategic case • Critical water supply in current capital Strengthened national unity and redistribution of socio economic opportunity Economic case • Indonesia's position in South-east Asia's Smart City Index offers room for improvement, 2020 1 Change in rank since 2019 0 Financial case Rank (of 109) . Strategic Financial Presence of sufficient funding to finance expected project cost case case Singapore Commercial case • Viability of project completion, given Commercial case 54 capacity of available resources Kuala Lumpur 16 $33bn, 10-year project 71 Bangkok announced in April 2019; 2024 14 target date for first occupants 84 Hanoi -18 Economic case Human-centred model for other Indonesian cities Sustainable construction, renewable Management case energy and waste management Cities such as West Java's capital, Bandung, and South Sulawesi's capital, Makassar, are working to leverage technology for better quality of life: Bandung digitised public services to reduce bureaucratic red tape, lower corruption and boost efficiency; Makassar hopes to leverage 5G technology, launched in the city in December 2021, to revive agriculture, trade and tourism, and enhance local lifestyles. New capital city's development sources, 2019 26.4%- 54.4% PwC Private sector 19.2% Management case Strong project management office • Efficient and transparent organisational structure The new city is being designed to: Be Pollution-free . OBG ESG Report Public-private partnership State budget Environmental and social risks Concerns remain about the impact on local biodiversity, despite President Jokowi's commitment to protect Borneo's rainforests and endangered animals, as well as indigenous communities OXFORD BUSINESS GROUP • Congestion-free Free from health risks such as air pollution and lack of sanitary facilities Plans to only allow EVs and for 80% of movement of people to happen via public transportation, walking or cycling Sources: PwC; Reuters 94 Jakarta -13 104 Manila -10 . Expand • • · · Innovative sustainable construction projects Water cycle management Technologically integrated urban management Effective and eco-friendly public services Public health care as a priority . Large public spaces • Inclusive society Integrated sustainable living solutions Smart capital President Jokowi officially announced the migration of Indonesia's capital city from Jakarta to Borneo's East Kalimantan in August 2019. This $33bn, 10-year project aims to offer a green, tech-integrated and socially inclusive solution to the overcrowding, traffic congestion, high pollution and health risks of Indonesia's existing capital city. While concerns remain about the impact on local biodiversity, the new capital's ESG-aligned urban planning and construction could serve as a blueprint in smart city development for other cities in Indonesia and the region. The ambitious project, partially delayed by the pandemic, will be financed through public-private partnerships and global foreign investment, as well as the government budget. 29 29#30Julian Smith, ESG and Net Zero Leader, PwC Indonesia What are the challenges for organisations seeking to start their ESG journey? Organisations can start their journey by carefully analysing which ESG factors will affect their industry and their company. The business environment is now more complex and dynamic than ever before; companies need to recognise that certain trends will require an adaptation of their business model and potentially lead them to exit some activities altogether. It is important to remember that ESG offers opportunities – including new products, green business models, additional revenue streams from the circular economy, and ESG-related services and branding - as well as threats. - Organisations must take a holistic approach by considering capital and stakeholders, and evaluating how ESG impacts expectations of management and operations. In which ways can organisations leverage technology for ESG-related goals? Changes in consumer preferences present opportunities for value creation. Many organisations would adopt ESG-friendly products and services if they were readily available and did not come at such a high cost. This creates an opportunity for businesses to launch new product lines or re-brand existing lines to emphasise ESG principles and benefits. It is crucial to avoid greenwashing in areas ranging from environmental impact to the treatment of employees. This is one of the most significant ESG-related business risks. As the price of carbon continues to increase, Indonesia's businesses - particularly in primary industries such as logging and mineral mining – have the opportunity to generate a new revenue stream from carbon credits. - Yuliana Sudjonno, Assurance Partner, PwC Indonesia In what ways does trust contribute to building a strong ESG ecosystem? ESG is about a business' ability to build trust with its stakeholders; trust between a company and society can lead to higher value for shareholders. It is important that companies disclose their non-financial performance in a manner that is transparent, accurate and reliable. All companies are exposed to ESG-related risks, but firms that are transparent and honest about those risks and can present a comprehensive risk-management and mitigation plan will be better positioned for a favourable ESG rating. How can firms choose which ESG reporting frameworks and standards to use? As announced at COP26, the UN Conference on Climate Change, the International Financial Reporting Standards Foundation will lead the convergence of key international frameworks to form global ESG reporting standards through the International Sustainability Standards Board. The main challenge is to develop a set of core indicators that can be applied uniformly across all markets and industries. Companies must start now in order to comply with regulatory or investor requirements; identify ESG risks and opportunities; and understand what gaps exist in terms of data collection and capacity to monitor and achieve ESG targets effectively. PwC OBG ESG Report OXFORD BUSINESS GROUP "Changes in consumer preferences present opportunities for value creation" 30 30#31www.pwc.com/id The report was first published by Oxford Business Group in December 2021. This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in the document without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this document, and, to the extent permitted by law, PwC Indonesia, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this document or for any decision based on it. The documents, or information obtained from PwC, must not be made available or copied, in whole or in part, to any other persons/parties without our prior written permission which we may, at our discretion, grant, withhold or grant subject to conditions (including conditions as to legal responsibility or absence thereof). © 2021 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see http://www.pwc.com/structure for further details.