15 Dec 2023
Indonesia’s FSA Issues New Regulation to Expand Range of Sustainable Securities

On 5 October 2023, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan / “OJK”) issued OJK Regulation No. 18 of 2023 on Issuance and Requirements for Sustainable Debt Securities and Sustainable Sukuk (“Reg. 18” or “New Regulation”).[1] The New Regulation, which entered into force on 10 October 2023, revokes and supersedes OJK Regulation No. 60/POJK.04/2017 on the Issuance and Requirements of Green Bonds (“Reg. 60”).[2]

The key differences between Reg. 18 and Reg. 60 are:

1. the scope of Reg. 60 was confined to conventional “green bonds.” By contrast, the ambit of Reg. 18 is considerably broader as it encompasses both conventional sustainable debt securities and sharia sustainable securities (collectively “Sustainable Securities”) across a range of different classes.
2. while the focus of Reg. 60 was confined to the environmental aspects of sustainability, the New Regulation also addresses the social aspects
3. Reg. 60 only applied to public offerings of securities, while Reg. 18 applies to both of public offerings and private placements.

Encouragingly, the New Regulation incorporates standards established by the International Capital Markets Association, ASEAN Capital Markets Forum (ACMF), and the SRI Sukuk Framework published by the Securities Commission Malaysia.

A. What are Sustainable Securities?

Reg. 18 provides that:

1. sustainable Securities consist of the following classes:

a. Green bonds/sukuk[3];
b. Social bonds/sukuk;
c. Sustainability bonds/sukuk;
d. Sukuk-linked waqf[4];
e. Sustainability-linked bonds/sukuk;
f. such other classes of Sustainable Securities as may be approved by the OJK; and

2. and may be issued to finance or to refinance:

1. Environment-based business activities (kegiatan usaha berwawasan lingkungan);
2. Social-based business activities (kegiatan usaha berwawasan sosial); and
3. Activities/ projects to optimize Return on Waqf Assets (for the issuance of Sukuk-linked Waqf).

B. Principal issues to consider when issuing Sustainable Securities

1. Green bonds/sukuk, social bonds/sukuk, sustainability bonds/sukuk, and sukuk-linked waqf

When issuing the above classes of Sustainable Securities, the issuer must have regard to the following four matters:

a. Use of proceeds

The issuer must ensure that the proceeds from an issuance of Sustainable Securities are used directly or indirectly for financing/refinancing purposes that are in line with the characteristics of the particular class of security. Both business and other activities (whether new, ongoing or completed) may be financed/refinanced by Sustainable Securities.

b. Evaluation and selection of activities to be financed

The issuer must adopt internal processes to evaluate and select environmentally and socially aware business activities that are suitable for financing by Sustainable Securities, and processes and methods to identify and manage environmental and/or social risks that are potentially material to the business or other activities that will be financed.

c. Management of proceeds

The issuer must ensure that the proceeds of Sustainable Securities are administered separately. At a minimum, they must be held in a special bank account.

d. Reporting

Reg. 18 requires the issuer to submit regular reports to the OJK following the issuance of Sustainable Securities.

2. Sustainability-linked Bonds/Sukuk

An issuer of sustainability-linked bonds/sukuk must have regard to the following issues:

a. Determination of key performance indicators (KPIs)

An issuer is required to adopt KPIs of sustainability, which must be: (i) relevant, central and material, and strategic for the current or future business activities of the issuer; (ii) capable of measurement or quantification using a consistent methodology; (iii) comparable; and (iv) provable and justifiable.

b. Determination of KPI-based Performance Targets (PTs)

PTs must be adopted that, at a minimum, comply with the following requirements:

1. represent a significant improvement in each KPI and exceed the previously achieved PT;
2. are comparable with external benchmarks or references (if any);
3. are consistent with the company's internal sustainability strategy (if any); and
4. have a clear timescale for implementation.

c. Characteristics of the securities

The characteristics of sustainability-linked bonds/sukuk must be designed in such a way as to facilitate the achievement of the Sustainability KPIs and Sustainability PTs that have been determined by the issuer.

d. Verification

“Verification” refers to review of KPIs and PTs. Such review must be conducted by an external reviewer and, at a minimum, have regard to the following issues:

1. the relevance and reliability of the selected KPIs;
2. the rationality of the PTs and their level of ambition;
3. the relevance and reliability of the benchmarks used; and
4. the credibility of the strategy for achieving the KPIs.

e. Reporting

The issuer must report to the OJK on the achievement of KPIs and PTs.

The matters listed in points a to e above must be addressed in all relevant documentation, including registration documentation, private placement documentation, prospectuses, and informational memoranda.

C. External Review

Reg. 18 requires that prior to any issuance, change of the use of proceeds or change in the status of Sustainable Securities, the issuer must obtain a review from an external reviewer (referred to as the “independent party” in the case of sukuk-linked waqf). The reviewer’s role is essentially to ensure that the following requirements have been complied with:

ABNR Commentary

Reg. 18 is to be welcomed as it broadens the scope of, and provides greater clarity on, sustainable financial instruments, which were previously governed by disparate regulations that frequently lagged behind market developments. It is also to encouraging that Reg. 18 has been drafted having regard to the latest standards and best practices published by a number of international bodies.

If Indonesia’s dreams of harnessing sustainable finance to the maximum are to succeed, it is essential that the country develops a solid reputation for reliability, integrity and credibility in this important field. Hence the requirement in Reg. 18 for the independent review of sustainable securities. Unfortunately, however, the OJK has yet to adopt rules that govern the qualifications and registration of reviewers (unlike in the case of other capital markets support professionals, such as accountants, legal counsel and appraisers). Therefore, it appears likely, for the time being at least, that only globally established reviewers will be acceptable to the OJK. While this may be beneficial for investors (as such reviewers would presumably be perceived as more reliable than local ones), it will likely lead to higher issuance costs as compared to those for traditional bonds/sukuk.

ABNR is a leading Indonesian law firm for capital markets and ESG. Should you require further information or assistance on sustainable bonds/sukuk, please do not hesitate to contact ABNR partner Mr. Ayik Candrawulan Gunadi (agunadi@abnrlaw.com), senior associate Mr. Novario Hutagalung (nhutagalung@abnrlaw.com) or associate Mr. Aldi Prapanca (aprapanca@abnrlaw.com).