Law Firm Management News October 2012 - CSR regulation in Indonesia

Corporate social responsibility regulation in Indonesia

Cornel B Juniarto
Hermawan Juniarto, Jakarta
cbjuniarto@hermawanjuniarto.com

Andika D Riyandi
Hermawan Juniarto, Jakarta
adriyandi@hermawanjuniarto.com

 

After almost five years since the enactment of Law No 40 of 2007 concerning Limited Liability Companies (‘Law 40/2007’), the Indonesian Government has finally enacted the implementing regulation derived from Article 74 of Law 40/2007 which states that companies that manage or utilise natural resources, or that impact natural resources, are required to fulfill social and environmental responsibilities. As an implementing regulation, Government Regulation No 47 of 2012 concerning Social and Environmental Responsibility of Limited Liability Companies (‘GR 47/2012’) specifically addresses the relevant issues of Corporate Social Responsibility, as generally applicable to Indonesian companies. GR 47/2012 took effect on 4 April 2012 and provides certain issues related to CSR obligations, implementations and sanctions.

CSR obligations

GR 47/2012 stipulates that all companies that manage or utilise natural resources or that impact natural resources are required to bear a social and environmental responsibility which is harmonious and balanced with the surroundings and the local society according to the values, norms and culture of that society. Obligations include the preservation of the function of the environment pursuant to the law along with its implementing regulation regarding natural resources or matters pertaining to natural resources as well as the ethics of running a company. One example is the obligation to implement community development according to Law No 4 of 2009 concerning minerals and coal. In addition, this regulation also stipulates that CSR is required to be practiced both inside and outside the company.

CSR preparation, implementation and reporting

A company’s CSR programme and its related budget must be included in its annual work plan. This work plan is to be approved by the board of commissioners or the general meeting of shareholders of the company (based on the company’s articles of association or as otherwise provided by law). The results of the implementation of the CSR work plan for the previous year must be included in the company’s annual report, given to shareholders at the annual shareholders meeting.

The CSR requirements

Regarding the requirements for implementing a CSR programme, below are some examples of regulation which already included the requirements for the company based on their business activities.

State-owned enterprises
In regards state-owned enterprises (‘SOE’), the Ministry of State-Owned Enterprises (‘Ministry of SOE’) has issued certain regulations which are similar to the concept of CSR. The Ministry of SOE Regulation No Per-05/MBU/2007, regarding state-owned enterprises partnerships with small businesses and environmental development, provides that the budget for the Partnership and Environmental Development Programme (‘PEDP’) is obtained from:

  • the allocation of profits after a maximum tax deduction of two per cent;
  • the surplus of other SOE’s PEDP; and
  • any related administrative fee based income arising from the PEDP after the operating costs deduction.

Mining industry
Under Government Regulation Number 23 of 2010 concerning the implementation of mineral and coal mining business activity, the concept of CSR is stipulated in Chapter XII about society development and empowerment around the mining licence area and the special mining licence area. Accordingly, the holder of a mining business licence (‘MBL’) and a special mining business licence (‘SMBL’) is required to have a development and empowerment programme which is funded by the MBL and SMBL budget every year. Unfortunately, there is no further explanation and/or requirement regarding the budget amount. The holder of a MBL and SMBL is also required to report the plan and estimate the cost of the programme implementation annually as well as reporting the realisation every six months.

Upstream oil and gas industry
The oil and gas industry, especially in the upstream business activity, is required to stipulate the implementation of CSR in the contract. The obligation to implement a CSR programme is based on Article 26 of Government Regulation Number 35 of 2004 as amended several times into Government Regulation Number 55 of 2009 concerning upstream business activity in the oil and gas industry which stated that the minimum provision in the contract, which is required to have several points, regards the impact and development of the society and the rights of indigenous societies. Moreover, the company is required to allocate part of its annual budget to develop the environment and society.

Downstream oil and gas industry
Under the Ministry of Energy and Natural Resources Regulation Number 0007 of 2005 concerning terms and guidelines of the business licence implementation in downstream business activity in the oil and gas industry, every company which engages in the processing, transporting, storage and/or general commerce of downstream business activity is required to ensure health and safety, environmental management and development of society. However, it is still unclear what the requirements are for the company in terms of developing the society. In addition, the amount the company is expected to put aside in its budget to assist with developing the society is not stipulated.

Based on the above examples, the regulation in each sector does not clearly stipulate the budget amount or the source of the funds that is required by the company for CSR matters. In this case, and since GR 47/2012 does not assist in this matters, another regulation that clearly states the minimum budget amount and its source for implementing a CSR plan is still required.

Awards and sanctions

Law 47/2012 states that every company which has participated in the implementation of CSR can be rewarded by the authorised agencies. Although the form of the reward given is not specifically stipulated in this regulation, in the elucidation of the regulation the reward is referred to, for example, in the form of privileges or other forms of rewards.

On the other hand, a company which does not implement CSR can be subject to sanctions in accordance with the provisions of the relevant laws. These sanctions are all stipulated in the laws related to the business activities of the company. One example is Law No 27 of 2003 concerning geothermal activities (‘Law 27/2003’). According to Law 27/2003, the holder of a geothermal MBL is required to implement a local community development and empowerment programme. An MBL holder who intentionally abandons its work area without fulfilling its obligation to implement a local community development and empowerment programme can be subject to criminal sanctions in the form of imprisonment for a maximum of six months. As such, companies will be subject to different sanctions and requirements according to their various business activities.