Corporate Social Responsibility regulation in Indonesia

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Corporate Social Responsibility regulation in Indonesia

By Federica Gentile  on March 14th, 2014 | In Regulations | Comments
Corporate Social Responsibility regulation in Indonesia Photo: CSR SMEs

In 2007, with the promulgation of the Law No. 40 on Limited Liability Companies, Indonesia was the first nation in the world to adopt a mandatory approach to Corporate Social Responsibility (CSR).

Years later, the reception and implementation of CSR is still fraught with difficulties.

Corporate social responsibility fosters inclusive economic growth

The World Bank defines Corporate Social Responsibility as "the commitment of businesses to behave ethically and to contribute to sustainable economic development by working with all relevant stakeholders to improve their lives in ways that are good for business, the sustainable development agenda, and society at large".

Thus, the adoption of CSR involves the integration of considerations regarding the environmental and social impact of economic activities with concerns related to the productivity and overall competitiveness of companies. Various studies point out the benefits of adopting CSR activities especially in terms of a better and more efficient use of energy and natural resources, a greater degree of innovation, improved relations with the community, and better working conditions.

A heightened attention to CSR on the part of businesses, especially in the Asian context where violation of workers’ rights are still a pressing issue, can help not only to fight exploitative labor conditions, but also to prevent and minimize environmental damage caused by industrial production.

Furthermore, Asia in general, and Indonesia in particular, attract significant investments of multinational corporations outsourcing their production. Therefore, given that over the years supply chain violations of workers’ rights and environmental damages have been a constant, the promotion of a CSR culture is extremely important because it could foster a business environment more conducive to fair and responsible business practices for both multinationals and local contractors alike.


Source: ILO Key Indicators of Labor Market (2011)

The matter is particularly urgent: the 2014 Maplecroft’s Human Rights Risk Atlas, points out that working conditions are deteriorating in low-cost sourcing countries, such as the Philippines, Viet Nam and Indonesia. Furthermore, data of the Indonesian National Commission on Human Rights (Komnas HAM) reported by the The Jakarta Post show that 20% of human rights complaints handled by the Commission between January and November 2012 were complaints against businesses related to environmental damages and land and labor disputes.

Mandatory Corporate Social Responsibility in Indonesia

In 2007 Indonesia promulgated the Law No. 40 on Limited Liability Companies, whose Art. 74 obliges companies carrying out activities in the natural resources sector and in related sectors to participate in environmental social responsibility, thus making Indonesia the first nation in the world to adopt a mandatory approach to CSR. This law has been the object of some critiques: initially Art. 74 was supposed to apply to all Limited Liability Companies, but, after lobbying from the Indonesian Chamber of Commerce (KADIN) and other business organizations, the Article has been modified. The business community was also alarmed about the mandatory nature of CSR devised in the Law, arguing that it could negatively affect corporate costs.

In 2012 the provisions of Art. 74 were implemented with the Government Regulation No. 47/2012 on Social and Environmental Responsibility of Limited Liability Companies, which states that the companies’ Boards of Directors are responsible for the preparation of a social responsibility plan and budget. The regulation deals also with incentives for companies complying with the law and sanctions for companies which do not fulfill the CSR obligations.[1] CSR-related obligations are also included in Art. 15 of the Investment Law (Law No. 25/2007) and in the State-Owned Enterprises Law (Law No. 19/2003).

Factors such as different perceptions of CSR among various socio-economic players (business organizations, government, etc.), a certain degree of ambiguity in the law, and weak law enforcement are currently slowing down the homogenous reception and implementation of social responsibility in Indonesia. CSR is still perceived as a cost likely to burden companies, instead of being perceived as an investment which could potentially lead to increased economic competitiveness and to a fairer and more inclusive economic growth.

[1] For a more detailed analysis of Law n. No. 40/2007 and Government Regulation No. 47/2012, see CSR Regulation in Indonesia

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About the author: Federica Gentile

Federica Gentile

Federica earned a BA in Political Sciences with a specialization in International Economics (University of Turin), and an MA in Women’s Studies (University of Cincinnati, US). She has been working in the US, Canada, Israel and the Palestinian territories, mainly in the fields of social sciences and gender studies. Recently she focused her research on corporate social responsibility, sex trafficking, and social innovation.


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