Learning from Indonesia: A new era of international business regulations

How do issues and conflicting interests such as we are seeing in terms of Sustainable Development, Business and Society look like from a developing country perspective, and in particular a place like Indonesia where continued heavy reliance on mining-minerals and palm oil exports are having devastating effects on local environment and planetary climate. Are policy makers and others obliged to go about this alone and in isolation, or is there a broader movement which is helping shape the relevant policies and practices in the country? Let’s hear what s writer who is head of sustainability at an agribusiness company in Jakarta has to say on this subject.

– Edi Suhardi, The Jakarta Post. Jakarta | Tue, 05/31/2011

President Susilo Bambang Yudhoyono last week signed a decree suspending new concession permits and improving good governance on primary forest and carbon-rich peatland in Indonesia as part of the Indonesia-Norway agreement on the climate change program. This decree, along with agreements inked during the ASEAN Summit earlier, showed Indonesia’s progressive move to integrate itself in the international community.

While ASEAN’s soft institutional approach to establish one community may differ from the EU, which is more institutionalized, we can see globalization drives social, economic and political actions of nation-states that to some extent erode national regulations.

In the globalized context, first, we are not speaking as Indonesian citizens, but as ASEAN society, and even, following the Bali Conference of UNFCC in 2007, world society.

Second, the political power is not vested solely by the state, particularly the executive and House of Representatives. We are now witnessing significant influence of business actors, local and international NGOs.

Third, global regulations do not regulate national states only, but also can reach multinational companies, domestic companies and the general public.

Not so long ago, most regulations were enforced by state institutions. However, since the advent of the sustainability development movement in the 1980s, many have acknowledged the importance of a softer form of regulations, such as codes or standards.

We can see the Indonesian example as far back as early 2000, such as the Indonesian Code on Good Corporate Governance issued by the National Commission on Corporate Governance.

This commission is a multi-stakeholder commission, chaired by a respected figure from the business sector, with members from various government institutions, business actors, academics and respected human rights and anticorruption activists.

The commission started as a private sector initiative, but later was formalized through a coordinating minister for the economy’s decree. This kind of regulation will be more common in the near future.

So, is law related to business in the global context still relevant?

Yes, some national laws remain relevant, especially when they are limited in areas where companies lack international exposure.

In fact, some international regulations require endorsement by national governments, such as the Kyoto Protocol or the UN convention against corruption.

However, the multipartite regulation is becoming a norm and export oriented Indonesian companies should carefully look at international business regulations, particularly social and environmental ones.

There are five regulatory actors in a globalized context as defined by Crane and Matten. First, the international imperative regulation, which results from the intergovernmental process such as GATT and ASEAN-China Free Trade Area (ACFTA).

Statistics show that after ACFTA implementation, Indonesia’s export of commodities, especially minerals and palm oil, has significantly increased but the manufacturing industry suffered.

Second, global industry codes of conduct, which are voluntary, are produced by business, such as the International Council on Mining and Metals’ (ICMM) Sustainable Development Framework.

Third, global industry codes are negotiated with government institutions, such as the European environmental management system and standard and Renewable Energy Directive (RED).

Fourth, global industry codes of conduct are negotiated with civil society organisations, such as the Forest Stewardship Council (FSC).

Since early 2000, Indonesia has also seen more practices of ecolabelling, especially for the European market.

And last, global industry multipartite projects codes, such as the UN Global Compact, Global Reporting Initiative, Roundtable on Sustainable Palm Oil (RSPO), Roundtable on Responsible Soya (RTRS) and Roundtable on Sustainable Biofuels (RSB).

It is interesting to note that while Indonesia relies heavily on mining-minerals and palm oil exports, the international market and community see the two sectors differently.

Both of them are operating in a logged-over forest area and have faced local and regional resistance, especially from environmental and indigenous groups.

However, the international market and community do not need any substantial efforts from Indonesian companies to adopt the ICMM Framework.

On the other hand, palm oil companies face an international campaign led by international NGOs, demanding more sustainable practices.

While some parties believe that the negative campaign is ignited from trade wars from countries exporting other vegetable oils, we still need to take some precautionary and risk forward mitigating strategies by acknowledging that there has been a shift of power and authority in industry standards setting.

Government regulations have been progressively seen by international actors as inadequate to the changing environment. Consumers, market and civil society groups demand for more prudent and credible regulations with more stringent parameters and conditions.

There are some evolving regulations, such as the UN Global Compact, GRI Sustainability Reporting Guidelines, ISO, RSPO, ICMM’ Sustainable Development Framework and also FSC.

By applying those voluntary standards, either through the certifying process and products or labelling, we can expect that our exports can further strengthen the Indonesian economy and distribute wealth to all parts of the country.

Further, the voluntary nature does not prevent the market from imposing the standards as new platforms or requirements.

Some European countries, initiated by the Netherlands, have pledged to only buy certified sustainable palm oil by 2015. It is expected that such commitments will snowball and attract other countries to follow suit.

It is believed that the demand for a sustainable commodity will also go beyond palm oil, to the mining and metal industry.

To sustain economic growth and promote the added value of commodity industries the government has to take lead in advocating the industries to adhere to the global business standards.

The Indonesian industry needs to proactively engage in the formulation of international business regulations within multipartite and roundtable forums, such as the FSC, RSPO, RTRS and RSB. We need to use the forums to promote more realistic and acceptable standards.

The government needs to encourage the industry to embrace the global standards or international business regulations on top of national laws. The industry, on the other hand, must be able to adapt and mitigate the changing market behavior and standard setting.

The writer is head of sustainability at an agribusiness company. The views expressed are his own.


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