Overview

During the undertaking of various business activities, business actors should observe their responsibilities to the community and the surrounding environment. As a consequence, business actors, particularly companies, should focus not only on the economic dimensions of their operations but also on the social ones.^[1] These kinds of responsibilities are reflected through various Corporate Social and Environmental Responsibilities (“CSER”), which are expected to improve community welfare and protect the surrounding environment.^[2]

Unfortunately, Indonesia’s general public currently finds itself continually faced with allegations relating to well-known companies that misuse CSER as a method of channeling funds resulting from crime through the facilitation of smelter owners, among other parties.^[3] Such cases reveal the importance of business actors understanding the benefits, proper mechanisms and procedures that relate to their CSER obligations.

The Coordinating Minister of Human Development and Culture has stated that CSER represents one way in which the contribution of the business world to achieving Indonesia’s Sustainable Development Goals (SDG) can be strengthened through the targeting of poor and vulnerable groups and improving overall education levels, as well as the welfare of mothers, children and young people.^[4] In this regard, it should be noted that Law No. 40 of 2007 on Limited Liability Companies (“Law 40/2007”) sets out various CSER definitions and mandates. According to Law 40/2007, CSER is a commitment that is made by a company in relation to participation in sustainable economic development in order to improve quality of life and the environment in ways that benefit the company, local communities and the general public.^[5]

In order to ensure the proper implementation of CSER in line with social and environmental needs, as well as the achievement of various targets and purposes, the Indonesian Government has issued three legal frameworks that address this subject, specifically:

1. Regulation No. 47 of 2012 on the Social and Environmental Responsibilities of Limited-Liability Companies (“Regulation 47/2012”);
2. Regulation of the Minister of Social Affairs No. 9 of 2020 on the Social and Environmental Responsibilities of Business Entities (“Regulation 9/2020”); and
3. Regulation of the Minister of State-Owned Enterprises (Badan Usaha Milik Negara - “BUMN”) No. PER-1/MBU/03/2023 on Special BUMN Assignments and Social and Environmental Responsibility Programs (“Regulation 1/2023”).

While the regulations listed in points (1) and (3) above specifically apply to limited-liability companies and BUMN, it is vital to note that all types of business entities are required to comply with the various CSER provisions that feature under the framework of Regulation 9/2020. In addition, it should be noted that Hukumonline’s Legal Research and Analysis Team summarized the various BUMN CSER mechanisms that feature under Regulation 1/2023 in the following edition of Indonesian Legal Brief (“ILB”): “Special Assignments and Social and Environmental Responsibility Programs: Another BUMN Omnibus Regulation Issued”.

As CSER implementation is essential for numerous stakeholders, this edition of Indonesian Law Digest (ILD) offers a discussion of how business entities should undertake said implementation. Our analysis has been divided up as follows:

I. General Understanding of CSER Obligations

1. 1. Classification of CSER Provisions
   2. CSER Obligations

II. General Implementation of CSER by Business Entities

1. 1. CSER Implementing Mechanisms
   2. Coordination Through the CSER Forum
   3. Reporting, Supervision and Rewards

III. Court Decisions in CSER Implementation Cases

I.    General Understanding of CSER Obligations

A.   Classification of CSER Provisions

Broadly speaking, there are at least three different types of legal subjects that are obliged to implement CSER and these are specifically addressed by the following three regulations:

Overall, Regulation 47/2012 addresses persons in charge of the implementation of CSER, CSER activity plans and budgets, and the various types of sanctions that can be imposed upon any Companies that do not implement CSER. Meanwhile, Regulation 9/2020 broadly addresses the implementation of CSER, CSER forums, reporting and any other mechanisms that specifically relate to the implementation of CSER by Business Entities. Finally, Regulation 1/2023 addresses the management, supervision, reporting, committees and performance of BUMN CSER. The above-described regulations address the implementation and mechanisms of CSER for each type of legal subject, as further explained in the following sub-section.

B.   CSER Obligations

In Indonesia, CSER regulations are continuing to evolve in order to better promote responsible business practices. In this regard, Companies, Business Entities and BUMN are all obliged to contribute to social development and environmental well-being. These regulations provide a framework for the integration of CSER into business strategies, ensuring transparency and achieving measurable benefits for stakeholders and the environment. Based upon the above classifications, the following sub-sections summarize the various CSER obligations that apply to Companies, Business Entities and BUMN.

1. CSER for Companies

Regulation 47/2012 emphasizes that CSER is mandatory for Companies that engage in business activities in the field and/or that relate to natural resources.^[9] In addition, CSER obligations should be implemented both within and outside the operational areas of Companies.^[10] CSER should be implemented by boards of directors (“BoD”) based on annual work plans that have been approved by the relevant boards of commissioners or through general meetings of shareholders (“GMS”) in accordance with the relevant articles of association and based upon the principles of fairness and decency.^[11] As a result, annual work plans should at the least contain the activity plans and budgetary funds that are required for CSER implementation.[12] Meanwhile, the realization of CSER implementation budgets should be calculated as Company costs.[13]

Moreover, the implementation of CSER should be incorporated into Companies’ annual reports and should also be addressed in line with GMS accountability. Furthermore, any companies that do not implement CSER will be subject to the imposition of sanctions in accordance with applicable laws.^[14] It should also be noted that the implementation of CSER does not prevent Companies from also meeting their social and environmental responsibilities in other forms that differ from their official CSER obligations.^[15] In addition, companies that are in compliance with their mandated role to implement CSER but that have also implemented social and environmental responsibilities in other forms may be presented with awards by the relevant competent authorities.^[16]

1. CSER for Business Entities

Regulation 9/2020 clarifies that the implementation of CSER obligations by Business Entities represents, among other things, a form of participation in sustainable social development.^[17] In this regard, the issuance of Regulation 9/2020 simultaneously repealed and replaced Regulation of the Minister of Social Affairs No. 6 of 2016 on Corporate Social Responsibility and the Organization of Social Welfare (“Regulation 6/2016”), which focused on the responsibilities of Companies in relation to social welfare. In contrast, Regulation 9/2020, emphasizes Companies’ environmental responsibilities in addition to their social welfare responsibilities.

In this regard, the objectives of CSER implementation by Business Entities based on Regulation 9/2020 break down as follows:^[18]

1. Dealing with social problems;
2. Serving parties who require social welfare services; and
3. Improving image and profits and maintaining business continuity.

In addition, CSER can be implemented within certain sectors and can target certain groups that meet certain criteria (“CSER Target Criteria”), as listed below:

1. CSER for BUMN

Through the issuance of Regulation 1/2023, BUMN are obliged to organize CSER as a commitment and service to sustainable development through the provision of economic, social, environmental, legal and governance-related benefits. Such CSER should be implemented in line with principles that are integrated, focused and measurable in impact, that can be accounted for and that are part of a company's business approach.^[21] As a result, the implementation of CSER should be organized in line with the following principles:^[22]

Furthermore, the implementation of CSER has been divided into four stages that encompass planning, implementation, supervision and reporting, as summarized in the following table:

It should also be noted that CSER implementation can be funded through:

1. Activity budgets that are calculated as BUMN costs during the current budgetary year;
2. Provisions on net BUMN profits during the previous fiscal year; and
3. Other legitimate sources of funding in accordance with applicable laws.

Furthermore, a detailed set of mechanisms that specifically address the implementation of CSER through funding are set out under Regulation 1/2023.

II.  General Implementation of CSER by Business Entities

A.   CSER Implementing Mechanisms

Even though there are a number of specific regulations that address the various CSER obligations that specifically apply to Companies and BUMN, these parties are still required to comply with the provisions addressed under Regulation 9/2020, as covered in this section. Overall, CSER is implemented in line with two scopes of impact: within a given business entity and outside of said business entity.^[27] In essence, the implementation of CSER within a business entity relates to the commitment and efforts of the entity in question to ensure that the needs of its workers and their families are fulfilled in line with the CSER Target Criteria, as mentioned above.^[28]

In contrast, the implementation of CSER outside of a given business entity should manifest through the entity committing to further improving social prosperity, both within the areas that surround it and at the national level more generally.^[29]

In order to identify the types of efforts and commitments that define the range of impact of CSER implementation, the table below summarizes the types of measures that can be taken in relation to CSER implementation, both within and outside of business entities:

Regulation 9/2020 provides flexibility when it comes to CSER implementing mechanisms. In this regard, Regulation 9/2020 states that said implementation may be carried out directly by business entities, indirectly through third parties, in cooperation with communities and/or in collaboration with other business entities in the form of consortiums.^[32]

In comparison, while Regulation 6/2016 set out a similar scope and mechanism in relation to CSER implementation, this framework did not previously specify any instances of measures that could be taken in relation to each scope and mechanism.

B.   Coordination Through the CSER Forum

In order to promote, coordinate, facilitate and synergize the implementation of CSER, a forum should be established. Membership of this forum will be mandatory for business entities.^[33] At its core, the establishment of the forum should aim to achieve the following objectives:^[34]

1. Assist the Minister of Social Affairs and regional government officials in accordance with their respective authorities in order to optimize the implementation of CSER by business entities;
2. Assist and facilitate business entities during the implementation of CSER, as oriented towards the enhancement of social welfare; and
3. Coordinate and synergize regarding the implementation of CSER based on data and priorities.

The duties and functions of the forum are detailed in the table below:

In order to ensure proper coordination, the forum will be bound by only one article of association and one bylaw (“AD/ART”), as concluded through a national-scale deliberation of the forum. These will apply nationally across all organizational levels of the forum.^[37] The organizational structure of the forum breaks down as follows:

The mechanism for the establishment of the forum at the national, provincial and city/regency levels is regulated under the AD/ART of the forum.^[45] Moreover, organizational structures across all organizational levels of the forum are also regulated under the AD/ART.^[46] While it has been made clear that the forum’s membership will comprise business entities across all levels of its organization,^[47] detailed provisions on said membership, as well as the various duties and responsibilities of organizers and members, will also be regulated under the AD/ART.^[48]

C.   Reporting, Supervision and Rewards

Guidance and supervision of the forum will be carried out based on the relevant organizational levels. In this regard, details of the forum’s chain of supervision are summarized below:^[49]

1. The national-level forum will be supervised by the Ministry of Social Affairs and other related ministries/state agencies;
2. Provincial-level forums will be supervised by governors and other relevant authorities at the regional level; and
3. City/regency-level forums will be supervised by mayors/regents and other relevant authorities at the regional level.

Guidance and supervision will be implemented in relation to the forum’s various policies, programs and activities. Supervisory activities may take the form of technical training sessions, socialization, facilitation, monitoring, evaluation, supervision and reporting, as well as the digitalization of information, technology and communications systems.^[50] Forum organizers must also submit written reports on all forum activities in accordance with the chain of supervision outlined above. Reports on forum activities should be submitted on an annual basis at the least.^[51]

In terms of reporting obligations, it is important for all business entities that implement CSER activities to submit written reports to the Director-General of Social Empowerment through electronic systems on an annual basis at the least.^[52]

As the parties responsible for the direct supervision of CSER obligations, the Minister of Social Affairs, as well as relevant governors and mayors/regents, may bestow the Padmamitra Award upon any business actors that realize significant contributions and achievements during the implementation of their CSER obligations.^[53] Said awards may take the form of certificates of recognition and/or trophies.^[54] It should also be noted that compliance by business actors with the obligation to submit annual reports is one of the determining factors for the granting of awards.^[55]

In comparison, the previous framework of Regulation 6/2016 did not specifically regulate the mandatory submission of CSER implementation reports or the authority of officials to supervise business entities.

III. Court Decisions in CSER Implementation Cases

In terms of any non-compliance with the CSER obligations, it should be noted that neither Regulation 9/2020 nor Regulation 1/2023 feature any provisions that specifically address the imposition of sanctions upon business entities and/or BUMN that fail to fulfill their CSER obligations. Meanwhile, Regulation 47/2012 states that any Companies that do not meet their CSER obligations will be subject to the imposition of sanctions in accordance with the applicable laws and regulations. In this regard, despite highlighting the imposition of sanctions in line with any acts of non-compliance, Regulation 47/2012 did not specify the forms of sanctions that were to be imposed upon Companies.^[56]

Within the more specific context of investors, the various CSER obligations that are implied under the framework of Law No. 25 of 2007 on Investment (“Investment Law”) should be noted. In this regard, the Investment Law states that all investors^[57] are obliged to engage in corporate social responsibility in order to establish harmonious, balanced relations and conformity with environmental values, as well as with the norms and cultures of local communities. Under this framework, any violations of this obligation are likely to result in the imposition of administrative sanctions.^[58]

While the available legal instruments do not always provide a specific set of sanctions that can be imposed in relation to cases of non-compliance, it should be noted that CSER obligations may also lead to disputes that ultimately have to be settled through the courts. Summarized below are several such cases that offer a number of useful insights into the nature of CSER-related court disputes:

Decision of the Supreme Court No. 156 PK/PID.SUS/2015

Decision of the Supreme Court No. 1132 K/Pid.Sus/2018

Decision of the Supreme Court No. 114 PK/Pid/2023

As the above-outlined cases reveal, most of the cases that come before the courts that specifically relate to the CSER obligation generally involve the misuse of CSER funds by certain actors, ultimately leading to the imposition of criminal sanctions under the charge of the general crime or special crime of corruption. In this regard, recent research conducted by Hukumonline has revealed that precedents relating to the imposition of criminal sanctions for the failure of companies and/or business entities to perform their CSER obligations without the involvement of fund misuse cannot be found. Generally speaking then, it can be concluded that all failures to undertake CSER activities are the result of the embezzlement of the funds that are allocated to said activities.

In such cases, any intentional evading of the obligation to perform CSER will most likely result in the imposition of administrative sanctions in accordance with the applicable laws and regulations, as addressed under Regulation 47/2012 and/or the Investment Law.

Conclusion

In essence, the various CSER obligations that are set out under Regulation 47/2012, Regulation 9/2020 and Regulation 1/2023 represent efforts to find a proper balance between economic benefits and welfare benefits for society and the environment. In this regard, through the implementation of CSER, it is hoped that there will be further improvements in the standard of living of CSER targets. In addition, the above-listed legal frameworks are expected to become the basis upon which business actors commit to protecting and contributing to the surrounding environments through the implementation of CSER in accordance with applicable standards and procedures. As a result, business actors should no longer operate their businesses solely through a focus on business operations while ignoring their obligations to implement CSER.

Source: hukumonline.com