Artificial Strengthening of Sustainable Finance in Indonesia: Critical Notes on the Law on the Development and Strengthening of the Financial Sector

Jakarta, ResponsiBank – The House of Representatives of the Republic of Indonesia (DPR RI) has passed the Law on the Development and Strengthening of the Financial Sector (UU P2SK) in early January 2023. On the day of the last plenary session, Thursday 15 December 2022, the law was drafted using the omnibus it amended sixteen financial sector laws and was carried out in a hasty, non-transparent, and non-participatory process.

The Civil Society Coalition for Sustainable Finance consisting of ICEL, Jikalahari, and Responsibank Indonesia considers that the public consultations that have been conducted several times by the Ministry of Finance, Bank Indonesia, and the Financial Services Authority (OJK) are far from meaningful. This is because the public consultation was only limited to certain invitations and the text that was opened to the public was only the September 20, 2022 version. In addition, the channel for providing input was only opened within a minimal time limit and not many people knew about this channel, given the substance of the draft law which contained many . "Even discussions between the DPR and the government were carried out behind closed doors with minimal announcements on the agenda on the DPR's website and broadcast on Parliament TV, DPR's YouTube, and other news," said Dwi Rahayu Ningrum, Sustainable Development Officer of The PRAKARSA.

In addition to procedural problems, the P2SK Law is also considered to contain several articles with potential greenwashing in statutory products. Some of the problems that are highlighted by ResponsiBank include: First, sustainable finance as stipulated in Articles 222 to 224 has not succeeded in concretely amplifying the principles of sustainable finance. Aspects of Human Rights (HAM) and the environment are still far from applicable norms.

Refers to Equator Principles and United Guiding Principles on Business and Human Rights–as an international standard, in order to carry out sustainable finance, business institutions (in this case financing) are obliged to have environmental, social and governance policies internal to the bank. As well as carrying out human rights due diligence or known as human rights due diligence, regulates the disclosure of information in sustainable financial reports, and is obliged to implement grievance mechanisms and repair of damaged environment on gross financing. "These four fundamental steps are not reflected in the P2SK Law, so the P2SK Law only presents the phrase "sustainable finance" as a modern jargon in financial management that is meaningless," said Dwi.

Second, ResponsiBank Indonesia considers that the P2SK Law has not specifically provided protection for gender-friendly business practices and is considered ignorant of the fact that women can be disproportionately affected by financing that damages the environment and violates human rights. Third, the absence of obligations of financial service institutions to implement transparency and accountability in their activities. In sustainable finance, the performance of financial service institutions related to sustainable policies and the performance of clients or borrowing companies must be disclosed to the public. However, the P2SK Law misses the basic principles of sustainable finance, namely transparency and accountability. This also refers to public information disclosure as the exercise of public oversight of activities that have the potential or have damaged the environment and violated human rights.

Fourth, the P2SK Law is seen as having perpetuated the wrong application of restorative justice as a form of abolishing crimes and stopping investigations. This is regulated in Article 48B of the OJK Law which mixes the authority of OJK investigators with the concept of dispute resolution (grievance mechanisms). "In fact, the mechanism of restorative justice and the concept of dispute resolution do not abolish crime," said Dwi.

Fifth, this law is also said to have the potential to disrupt the independence of the OJK, with the establishment of the OJK Supervision Body in Article 38A. The OJK Supervision Body is a body that is selected, elected, and dismissed by the DPR. He is tasked with assisting the DPR RI in monitoring the performance of the OJK by summoning the OJK Commissioner, asking for information from the OJK, and requesting copies of the financial statements. According to constitutional law, the formation of this Supervision Body is considered dangerous for the sustainability of the OJK, which is an independent state institution because it allows the DPR to intervene in policies issued by the OJK.

Furthermore, the P2SK Law is also considered to have limited efforts to resolve disputes in consumer protection by only allowing filing of lawsuits through a dispute resolution agency that has obtained approval from the OJK in Article 245 paragraph (2) letter b. This is then considered to have the potential to hamper the independence of consumer dispute resolution institutions, because OJK will be supervised by the OJK Supervision Body. "Moreover, the P2SK Law closes the possibility of using the Consumer Protection Law, Law 8 of 1999 in Article 248. Thus, consumer protection institutions which have been advocating for consumer protection are not applicable in resolving consumer problems with financial service institutions," added Bi.

These various problems are considered to complicate the implementation of sustainable finance. The P2SK Law seems to provide pseudo progress on sustainable finance arrangements. Again, the formation of laws only targets business interests and needs. Indonesia's dream of carrying out sustainable development is still far from being overturned, seeing that the current legislation that promotes sustainable finance still fails to put pressure on business interests.

Thus, the Civil Society Coalition for Sustainable Finance asked the government to review several concepts in the P2SK Law whose arrangements could cause problems, such as sustainable finance, restorative justice, grievance mechanisms, and OJK supervision. In addition, the government is also deemed necessary to strengthen sustainable financial arrangements in a holistic manner, including grievance mechanisms in the derivative regulations of the P2SK Law.

Finally, the Civil Society Coalition for Sustainable Finance asked business people and financial institutions to implement human rights due diligence, starting from making policies internally, carrying out risk and impact assessments, carrying out internal integration, conducting monitoring and reporting, and carrying out remediation.

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