24 Apr 2021
Green investment is another term for sustainable investment, which is currently trending in developed countries. By definition, green investment is an investment that focuses on environmental, social, and good governance (ESG) aspects, intending to maintain the continuity of the economy and life on earth. Because of its impact on the long-term economy, no wonder this investment has the fastest growth in world capital markets.
This type of investment is also included in the impact investment category. Apart from providing financial returns to investors, there is a positive impact on environmental and social aspects.
The skyrocketing trend of green investment is also due to increasing investor attention on environmental issues. The issue of the global crisis, for example, encourages the presence of products or investment instruments related to the environment.
Nearly 2,400 managers and owners of financial assets signed the UN Principles for Responsible Investment (PRI) commitment, with total management of US $ 86 trillion for this investment.
Meanwhile, the latest survey conducted by the Global Sustainable Investment Alliance (GSIA) stated that green investment assets in developed countries grew to US $ 30.7 trillion.
Apart from that, there was an interesting finding of this ESG-based investment when the European Federation of Financial Analyst Societies (EFFAS) conducted a survey. They found that 86 percent of millennials (aged 18-35 years) view green investment as quite important nowadays, and it has changed their perspective within previous years.
Pioneer of Green Investment in Indonesia
What about the green investment climate in Indonesia, and when did it start?
Using ESG-based investment instruments, on June 8, 2009, the Biodiversity Foundation (KEHATI) in collaboration with the Indonesia Stock Exchange (IDX), launched an investment product; the SRI-KEHATI Index.
SRI stands for Sustainable Responsible Investment. It is safe to say that the SRI-KEHATI Index was the pioneer of ESG-based investment in Indonesia. The product is expected to be the basis for investment instruments in the capital market. For example, for conventional mutual fund investments, Exchange Trade Funds (ETFs), or other types of investment.
In general, KEHATI is a non-profit organization with the mandate to collect, manage and distribute grants for the conservation and sustainable use of biodiversity in Indonesia. The foundation, established on January 12, 1994, also took the initiative to fully support the government in managing environmental issues.
Introducing the SRI-KEHATI Index is one of KEHATI’s efforts to encourage investors who are interested in environmental and social issues. KEHATI also provides guidance for investing in a better and responsible direction. Additionally, the SRI-KEHATI index plays a role in creating benchmarks for the company’s sustainable performance in the Indonesian stock market.
Regarding work patterns, the SRI-KEHATI Index is run based on world investment trends. This refers to investors’ considerations that focus not only on financial aspects but also on environmental, social, and sustainable development principles. In short, the decision to invest is very much influenced by these crucial aspects.
Meanwhile, the daily operations and management processes of the SRI-KEHATI Index are entirely the responsibility of KEHATI and the IDX. There will be a special committee to handle the SRI-KEHATI Index, which acts as an advisory body in the constituent selection and drafting process.
The SRI-KEHATI Index is expected to realize sustainable business goals for companies listed on the IDX capital market (issuers). Of course, it is based not only on the financial aspect but also on long-term fundamentals.
“KEHATI is in the stage of encouraging the development of a responsible financial ecosystem and long-term investment. The goal is not only to build instruments and the ecosystem, but also to encourage regulators,” said the Executive Director of the KEHATI Foundation, Riki Frindos, in a webinar discussion between the KEHATI Foundation and Mongabay Indonesia, Tuesday (28/4/2020). In this context, Riki said KEHATI acts as a bridge between stakeholders.
Selectively Choosing Issuers
KEHATI’s encouragement of green investment also touches parties who have serious intentions to develop economic interests for future generations. The SRI-KEHATI Index is currently a constituent of 25 issuers deemed to have met the three assessments by KEHATI. KEHATI is quite strict in selecting investors. There are three aspects that guide their assessment, such as;
First, the company’s main business does not involve alcohol, weapons, pesticides, tobacco, pornography, gambling, mining, and genetic engineering.
Second, the assessment of financial performance with a market capitalization of at least IDR 1 trillion, total assets of not less than IDR 1 trillion, a positive price-earnings ratio (P/E), public ownership of more than 10 percent, and no loss.
Third, the assessment of fundamental aspects covering company attitudes on environmental and social issues, as well as human resource governance and human rights enforcement.
The assessment results are then evaluated twice a year in April and October, after which the IDX is published. Then, the issuer has the authority to compile the next SRI-KEHATI Index.
Even so, there are particular approaches that KEHATI has taken to potential investors who are still considered potential. For example, a company that wants to invest, but has not yet entered into the three aspects of the assessment.
“We will take an approach (engagement) to the company, and encourage them to improve their business model. We will also help them to create a roadmap, so that the company can be environmentally friendly,” said Riki. Riki does not deny that if there is a situation where a company needs to be educated concerning green investment, some compromises and agreements can be arranged.
Potential and Achievement of the SRI-KEHATI Index
According to KEHATI, the potential for green investment in Indonesia is still tremendous. Indonesia, with its vast forests and seas, will certainly attract investors when it comes to environmental matters. However, for investors, their interest in ESG-based investing not only focuses on environmental and social issues, but rather captures risk management opportunities in portfolios. This refers to various studies and research, which show that ESG-based investment can provide reliable performance. Green bonds have also been placed as a trigger for enthusiasm in green investment in Indonesia, although it is said to be still not very strong.
Since its publication in 2009, it has been proven that the SRI-KEHATI Index can achieve consistent performance with an average value of 10 percent above other indices. For example, the LQ45 Index and the Composite Stock Price Index (IHSG). This illustrates that investors are willing to pay premium fees for issuers that are members of SRI-KEHATI constituents.
Other data shows that SRI-KEHATI’s asset management (AUM) has also increased quite rapidly in the last three years. The most significant growth was recorded in the last two years when ESG-based mutual funds were launched, which refers to the SRI-KEHATI Index. The SRI-KEHATI index is also included in the category of socially responsible investing or ethical investing. This means the index is an investment strategy considering financial and social benefits that have a positive impact.
Omnibus Law and Investment Climate Bill
The various efforts made to encourage green investment, of course, must also be supported by a good investment climate. As we all know, this year, the government is focusing on the discussion and ratification of the Omnibus Law Bill, which aims to boost national economic growth. The Omnibus Law is a summary of laws (UU) designed to target a big issue. This law can revoke or amend several laws at once, so that it becomes concise.
Recently, there have been many public records regarding the draft Work Creation Bill which is part of the Omnibus Law. One of them is about the ease of short-term investment. Seeing this, Riki said, as the draft had not been implemented, it could not be used as a catalyst for green investment at this time. Even so, he was also anxious. “There is a potential for a backfire, if investors prefer short-term investments instead of long-term investments,” he said.
Riki emphasized that one of KEHATI’s goals is to encourage regulators to create a conducive climate for long-term investment. “We have to monitor, not for the sake of short-term investment; long-term investment is harmed,” he concluded.
This article has been published on goodnewsfromindonesia.id