ESG Market Trends and

Impacts on Indonesia

Melissa Cheok
Associate Director of ESG Research
December 2022
Sustainable Fitch ESG Solutions
ESG-integrated Credit Research & Analysis
Short-term
ESG Relevance Scores
ESG Relevance Scores articulate the level of
influence an environmental, social or
governance issue has had on a credit rating
decision.
ESG Relevance Scores are forward looking
and based on the base case forecasts for the
credit ratings of entities and transactions.
Fitch Ratings’ credit analysts systematically
evaluate ESG credit considerations
incorporated in its ratings methodologies.
The scores cover Environmental, Social and
Governance (E, S and G, respectively) risks
under a transparent sector based, cross-
asset, global framework.
Sector based templates provide clear
articulation of credit relevant ESG risks
Sector / Entity / Transaction
Long-term
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Vulnerability Scores (Climate VS) help
investors understand the ways in which
climate-related risks may impact their
portfolios, and how these risks may evolve in
the coming years in the event that global
warming is limited to 2 degrees Celsius.
Assess the vulnerability of the financial
profile of a sector, entity or instrument at
five-year intervals between 2025 and 2050.
Based on the UN-backed Principles for
Responsible Investment’s Inevitable Policy
Response scenario, refined and adjusted for
the in-depth sector knowledge of Fitch’s
rating analysts.
Sector / Entity / Transaction
Medium-term
ESG Research
Dedicated global ESG Research team based
across 3 continents who cover thematic and
cross-sector ESG credit risk, as well as
supporting credit analysts with themed
issuer and transaction specific research..
Thematic reports analysing ESG themes at a
macro-level, a sector level, and an entity /
transaction level with an emphasis on how
they are likely to affect sectors and entities
from a credit perspective.
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ESG themes that are most material and likely
to disrupt industries and business models.
Sector / Thematic
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Short-term Medium-term
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Holistic ESG analytical tools that help market
players to discriminate the ESG quality of
financial instruments and companies/issuers
3 main pillars:
ESG Entity Rating, with ESG peer comparison
tool
ESG Instrument Rating (bond and loan) for
both framework and conventional bonds and
loans. Financial instrument assessment
which takes account of the ESG credentials
of the issuer as well as the debt instrument
to produce an absolute comparative grade
for every piece of debt issued.
ESG Framework Rating for Green / Social /
Sustainability / Sustainability-linked bonds
and loans
Entity / Transaction
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ESG Rating Products: Methodology Overview

Our modular approach sees the separate Entity

Rating and Framework Ratings can combine to
produce the ESG Instrument Rating

Evaluates the entity activities from

ESG Entity an environmental and social
Rating perspective, as well as the quality of
governance

+
Evaluates the use of the proceeds
raised from the issuance as well as
ESG
the strength of the framework –
Framework
acting as a second party opinion but
Rating
with greater evaluation alongside
opining on alignment

=
Integrate the entity and framework
ESG
ratings to allow for an absolute
Instrument
comparison of all instruments
Rating
(labelled or conventional)

2
ESG RATINGS

Sustainable Fitch ESG Ratings are

designed to help market players to ESG Framework Rating
ESG Entity Rating ESG Instrument Rating
discriminate the ESG quality of (ER1-5) (IR1-5)
(FR1-5)
For GSS and Sustainability-
financial instruments and entities. linked bonds
They provide consistency, granularity
and transparency via:
Full coverage of labelled bonds (green, social, Evaluates the entity activities Integrate the entity and Evaluates the use of the
sustainable, KPI linked, transition) from an environmental and framework ratings to allow proceeds raised from the
social perspective, as well as for an absolute comparison of issuance as well as the
Instrument and Entity level reports and ratings the quality of governance all instruments (labelled or strength of the framework
(including framework analysis) conventional)

Ability to cover any debt instrument (bonds

and loans, labelled and conventional)
Fully modular grading system (access to sub-
grades for all main indicators)
Consistent disclosure of alignment indicators
(ICMA, UN SDG, EU Green Bond Standard, etc)

Ratings Reports Datasets

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4
Entity Ratings – Business Activities Scores
ESG.ER Business Activities Scores Entities that score well tend to have clear positive
Top 5 Sectors and Average
green and social impacts

Public Entities Companies that obtain good ratings may help them
gain access to lower cost of capital, build positive
Environmental brand reputation, aid in strategic decision making
Services

Power & Electricity Contributions to Sustainable Development Goals

Transportation – 7 Affordable and clean energy

– 9 Industry, innovation and infrastructure
Real Estate – 11 Sustainable cities and communities
– 12 Responsible consumption and production
All Sector Average – 13 Climate action

0 10 20 30 40 50 60 70
Source: Sustainable Fitch

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ESG Market
Trends – APAC
and Global
Bond Issuance Slowdown in Q3 ESG-Labelled Bond Issuance

Q1-Q3 2021 Q1-Q3 2022

Less issuance in every label in first three quarters Transition

of the year – driven by macroeconomic factors
Sustainability-linked

Sustainability
Share of ESG-labelled debt in APAC has risen from
16% in 2021 to 23% in 2022 Q1-Q3 Social

Green

China accounts for around half of total APAC 0 50 100 150 200 250 300 350 400
issuance YTD, followed by Japan USD bn

Source: Sustainable Fitch, EFData

Bright spots: APAC Green Bond Issuance Q1-Q3 2022

Others
– China onshore issuance 13%
Singapore
– Japan onshore issuance (especially transition) 5%
Korea China
11% 48%

Japan
16% Hong Kong
7%
Source: Sustainable Fitch, EFData

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Bond Issuances Among Regional Peers
Public Utilities Board
(Singapore)
SGD800 million green bond
Yield: 3.4%
Tenor of 30 years
Use of proceeds:
Sustainable water management
Aug 2022
Global Power Synergy PCL WHA Utilities & Power
(Thailand) (Thailand)
THB12 billion green bond THB 1.8 billion green bond
Yield: From 2.55% to 4.40% Yield: 3.06%
Tenors of 3-15 years Tenor of 3 years
Use of proceeds: Use of proceeds:
Clean transportation Renewable energy
Energy efficiency
Renewable energy
Pollution prevention & control
June 2022 May 2022
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Sustained Skew Towards SLBs Asia ESG Loans
Jan 2020 - present
Green Sustainability-linked
and SLLs USD bn
15

Sustainability-linked structure is firmly entrenched in the

10
bonds and loans markets, outpacing all other types
5
By June 2022, cumulative SLB issuance had reached
USD147 billion and accounted for 10% of the total 0
sustainable bond market in 1H22, compared to 1% at H1 2020 H2 2020 H1 2021 H2 2021 Jan-Apr 2022
the end of 2020 Source: EF Data, Sustainable Fitch

Pricing is reward-oriented with interest rate step

downs for SLLs and coupon step-ups for SLBs

Private nature of SLL deals could make companies

more comfortable setting reach targets but also
obscures performance to the wider market

Possibilities for new products and more data for

market participants

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Major Sustainability Regulations – APAC vs US Listed Companies

HKEx NYSE Nasdaq SGX

Governance
Board gender diversity Mandatory - Mandatory Mandatory (policy)

Board oversight of ESG strategy Mandatory Recommended Recommended Mandatory

ESG report same time as annual report Mandatory Recommended Recommended Mandatory
ESG reporting principles Mandatory Recommended Recommended Mandatory
Disclosures
Gender ratio Mandatory - Recommended

Emissions disclosures Comply-or-explain/Mandatory (2025) Recommended Comply-or-explain (selected sectors)

Resource use Comply-or-explain - Recommended If Material
Climate change Comply-or-explain - Recommended If Material
Anti-corruption Comply-or-explain - Recommended If Material
Health and Safety Comply-or-explain - - If Material
Supply chain management Comply-or-explain - - If Material
Product responsibilities Comply-or-explain - - If Material

Source: Sustainable Fitch

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ESG Disclosures Becoming Increasingly Embedded
Fortune 100 Sustainability Reporting
2022 Filings, 50 Companies

US political climate so far does not seem to be

affecting ESG disclosure activity
Human capital
Widening gap between investor expectations
and regulation for US entities
DE&I

In Asia, we have seen the emergence of more

Environment/Climate
regulations on disclosures
– Singapore Exchange launched ESGenome to
Board ESG management
aid companies in sustainability reporting

ESG reporting standard

0 10 20 30 40 50

Source: White & Case, Sustainable Fitch

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Key ESG Themes for Indonesia
Indonesia GSSS Bond Issuance by Type
Cumulative to Nov 2022
Green Sustainability
Source: EFData, Sustainable Fitch
Decarbonization of energy sector and shift to renewables (e.g.
JETP, ADB coal asset retirement)
Climate change adaptation and resilience – responding to physical
climate change risk
Sustainability-Linked
Deforestation – increasing regulatory response to address this
including restrictions on imports (e.g. EU draft anti-deforestation
law, US Lacey Act)
Sustainable urban development – low-carbon transportation,
waste management, energy efficiency
Opportunities for issuers:
– Sustainability and sustainability-linked bonds
– Natural capital
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Implications of Indonesia’s Just Energy Transition Partnership (JETP)

Indonesia’s JETP will mobilize at least USD20 billion in

public and private funding Indonesia's Energy Mix
Total primary energy consumption by fuel type in 2020

Goals are to increase share of power generated from Hydropower

renewables to 34% by 2030, reduce reliance on fossil fuels 3%

and create transition-aligned jobs Petroleum

32%
Coal
We expect to see more coal-fired power projects move 37%
towards early retirement in short to medium term

Will see an uptick in demand from power producers and

coal miners for financing to aid in transition,
Natural gas
– Greater activity in GSSS+ bond market Biomass/Others
17%
7% Geothermal/non
– More companies may explore transition bonds -hydro
– SLBs may be preferred option renewables
4%
Source: US Energy Information Administration, Indonesia's Ministry of Energy and Mineral Resources

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Indonesia is Highly Nature Dependent
High Nature Dependency In Emerging Markets
Nature dependency classification by region Beef and palm oil account for 57% of annual total GHG emissions
from deforestation
High Medium Low
Percent of GVA

100%
90% Palm oil is the primary cause of tree cover loss in the Borneo
80%
70% rainforest (Indonesia, Malaysia, Brunei)
60%
50%
40%
30%
20% Potential financing impacts:
10%
0% – Banks signing onto anti-deforestation agreements e.g. Soft

US
CSA

EU
India

Africa

China

Japan
Indonesia

Middle East
Commodities Compact, New York Declaration on Forests
– ING no new palm oil financing
Source: Fitch Ratings, WEF, PwC
– Norway’s government pension fund GPFG excluded or divested
Tree Cover Loss in Natural Forests
from more than 30 palm oil companies and more than 60 total
Brazil Indonesia Malaysia
'000 ha
8,000
related to deforestation
7,000
6,000
– Dutch national pension fund ABF divested from South Korea’s
5,000
4,000
POSCO over claims of clearing 20,000 hectares of natural
3,000
2,000
forest for palm oil in Indonesia
1,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Sustainable Fitch, Global Forest Watch

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