Sustainable Investing (ESG): Trend or Principle for Indonesian Investors?

Note: This article discusses Indonesian financial products and markets. The principles apply globally, though specific products, regulations, and tax treatments vary by country.

A new mutual fund launches with the name “XYZ Sustainable Growth Fund” — sounds cool and eco-friendly.

A bank promotes a “green bond” promising your investment helps the environment.

An investment manager claims “we focus on ESG” while still holding coal company stocks.

Which is real, which is greenwashing?

“ESG” and “sustainable investing” are appearing more frequently in Indonesia. But is this a passing trend like NFTs, or an investment principle that truly makes an impact — and affects your returns?

And more importantly for you as an investor: does ESG affect investment returns?

This article discusses ESG from the perspective of Indonesian retail investors — without excessive jargon, without greenwashing.

What Is ESG?

ESG stands for three criteria used to evaluate companies beyond financial performance:

Environmental

• Carbon emissions and environmental footprint
• Renewable energy usage
• Waste and pollution management
• Climate change risk to business

Social

• Employee treatment (fair wages, workplace safety)
• Impact on surrounding communities
• Customer privacy and data security
• Diversity and inclusion

Governance

• Board of commissioners independence
• Financial transparency
• Reasonable executive compensation
• Anti-corruption and anti-bribery

In essence: ESG measures how companies manage non-financial risks that could affect long-term performance.

ESG vs Sharia Investment: Similar but Different

Since Indonesia has the world’s largest Muslim population, it’s natural to ask: what’s the difference between ESG and sharia investing?

Interestingly, sharia mutual funds in Indonesia indirectly already apply some ESG principles — especially the governance and social aspects. But they’re not the same thing.

ESG Status in Indonesia: Where Are We Now?

Regulation

OJK (Otoritas Jasa Keuangan / Financial Services Authority) has issued several important policies:

1. POJK 51/2017 — Requirement for financial service institutions to prepare sustainable finance action plans
2. Taksonomi Hijau Indonesia (Indonesian Green Taxonomy) — Classification of economic activities based on environmental impact
3. Roadmap Keuangan Berkelanjutan Tahap II (Sustainable Finance Roadmap Phase II) (2021-2025) — Target for ESG integration across all financial sectors

Available ESG Products

As of 2026, ESG products for Indonesian retail investors are still very limited:

• ESG mutual funds: Some investment managers have launched mutual funds with ESG labels, but the number is still small
• ESG index: BEI (Bursa Efek Indonesia / Indonesia Stock Exchange) has had the ESGI (ESG Leaders) index since 2020, but there’s no retail ETF that tracks it efficiently yet
• Green bonds: Some corporations and the government issue green bonds, but retail access is limited

Reality: The ESG ecosystem in Indonesia is still in a very early stage compared to markets like Europe or America.

The Crucial Question: Does ESG Reduce Returns?

This is the most frequently asked question by investors, and the answer is more nuanced than you might think.

What Global Research Says

A meta-study from NYU Stern Center for Sustainable Business (2021) analyzed more than 1,000 studies and found:

• 58% of studies showed positive correlation between ESG and financial performance
• 13% of studies showed negative correlation
• 29% of studies showed neutral/mixed results

General conclusion: ESG does not systematically reduce returns. There’s even indication that companies with good governance (G) and solid environmental risk management (E) tend to be more crisis-resistant.

But There Are Important Caveats

1. Correlation is not causation — companies with good ESG might also be companies that are better managed overall
2. Screening costs — ESG mutual funds often have higher expense ratios
3. Limited diversification — screening companies means your portfolio is less diversified
4. Inconsistent ESG data — ESG ratings from different agencies often contradict each other (unlike credit ratings which are relatively consistent)

For the Indonesian context, data is still very minimal. Don’t assume that global findings automatically apply to the domestic market.

The Biggest Threat: Greenwashing

Greenwashing is the practice of companies or investment managers claiming ESG without real substance.

Signs of Greenwashing

1. Labels without methodology

Mutual funds that add “sustainable” or “ESG” to their names without explaining the screening criteria used. Ask: “What specific ESG criteria are used to screen issuers?” If there’s no clear answer, be wary.

2. Cherry-picking metrics

Companies that promote one small green initiative (for example, planting 100 trees) while ignoring the main environmental impact of their business (for example, factory emissions). This is like an influencer who only shows green portfolio but hides losses.

3. Engagement without change

Investment managers who claim “we engage with companies for ESG improvement” but never show concrete results or their voting record at RUPS (Rapat Umum Pemegang Saham / General Meeting of Shareholders).

4. Conflicting ESG ratings

Companies that receive high ESG ratings from one agency but low from another. This shows that ESG standards aren’t mature yet and investors should be skeptical of single ratings.

How to Verify ESG Claims

1. Read the fund fact sheet — look at portfolio composition, not just the mutual fund name
2. Check screening methodology — must be clearly written in the prospectus
3. Compare with index — if an “ESG” mutual fund contains the same as IHSG, what’s different?
4. Check issuer sustainability reports — large companies are required to publish sustainability reports

How Can Indonesian Retail Investors Get Started?

If you’re interested in investing that considers ESG factors, there are several practical approaches:

Approach 1: DIY Screening (Simple)

Choose index mutual funds or blue-chip stocks that have:

• Published sustainability reports
• Included in BEI’s ESGI index
• Not involved in major controversies (corruption, pollution, etc.)

This isn’t strict ESG screening, but it’s better than nothing.

Approach 2: ESG Mutual Funds

Choose mutual funds that explicitly use ESG criteria. But:

• Check the expense ratio — don’t pay a high premium just for the “ESG” label
• Compare performance with similar conventional mutual funds
• Read the screening methodology

Approach 3: Avoid the Worst

The simplest approach: don’t invest in companies that are clearly problematic. Companies involved in corruption scandals, severe environmental pollution, or worker exploitation — if you know about it, avoid it.

This isn’t ESG in the formal sense, but it’s good common sense and also reduces your portfolio risk.

ESG as Risk Management

A perspective that’s often overlooked: ESG isn’t just about “doing good.” ESG at its core is risk management.

• Environmental risk: Mining companies that don’t manage waste risk government sanctions or lawsuits
• Social risk: Companies with high employee turnover and bad reputation lose talent and customers
• Governance risk: Companies without independent audits and conflicted commissioners are more vulnerable to fraud

Investors who ignore these factors are not more rational — they’re just ignoring risks that haven’t materialized yet.

Conclusion: Both Trend and Principle

ESG in Indonesia today is both — a rising trend, as well as a principle with logical basis.

What you need to remember:

1. ESG isn’t magic — doesn’t automatically increase returns, but doesn’t systematically reduce them either
2. Greenwashing is real — be skeptical of ESG labels without clear methodology
3. ESG products in Indonesia are still limited — don’t force yourself to buy expensive products just for the label
4. ESG = risk management — well-managed companies tend to be more crisis-resistant
5. Start simple — avoid problematic companies, choose transparent ones
6. Foundation first — make sure emergency fund, asset allocation, and low costs are right before adding an ESG layer

Don’t let ESG become a reason to overcomplicate your investments. Disciplined passive investing with low costs is still more important than any label.

References

1. NYU Stern Center for Sustainable Business. “ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015–2020.” 2021.
2. Otoritas Jasa Keuangan (OJK). “Roadmap Keuangan Berkelanjutan Tahap II (2021-2025).” ojk.go.id
3. Bursa Efek Indonesia. “Indeks ESG Leaders (ESGI).” idx.co.id
4. OJK. “Taksonomi Hijau Indonesia.” 2022.
5. RIAA. “From Values to Riches: Charting Consumer Demand for Responsible Investing in Australia.” 2022.

Disclaimer: This article is for education only, not investment advice. Investment decisions are your responsibility.

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