Jurisdictional Approach to Address the Climate Crisis in Indonesia

The current and projected climate crisis will increase the average temperature significantly. The Paris Agreement has been adopted to keep the temperature at well below 2 degrees Celcius (°C) possibly not to exceed 1.5 °C, but the window of opportunity is closing rapidly1.

About 6.6 billion tons of heat- inducing carbon dioxide-equivalent of greenhouse gases (GtCO2e) were emitted worldwide by land-based sector, out of the total 58.1 GtCO2e in 20192. Addressing the climate crisis, therefore, requires significant reductions and avoiding of emissions of greenhouse gases and increasing sequestration and storage capacity of these gases, including and especially that of nature in the land-based sector. The New York Declaration on Forests (NYDF) was signed by countries and corporations in 2014 to halve deforestation by 2020 and reverse it by 2030. But instead, deforestation increased3. The world lost about 26 million ha between 2014-20184.

Most recently, jurisdictional approach is gaining momentum as a way to consolidate efforts toward land-based sustainability, including and especially reduction of deforestation and degradation of forests. Jurisdictional approach has grown out of landscape approach in which production and protection will be harmonized in synergy, spatially and participatorily.

Global Concern for Deforestation-free and Sustainable Supply Chains of Soft Commodities

Global demand for soft commodities continues to increase as the world’s population is expected to grow to almost 10 billion by 2050, accompanied by economic growth. These trends put pressure on land use as well as pose challenges for soft commodities supply chain sustainability.

Various elements of society, including businesses, have started to jack up their awareness of this issue. In November 2015, 14 US-based FMCG companies, such as General Mills, Mars Inc, and PepsiCo, signed a joint letter urging world leaders to adopt a strong global climate deal at the COP21 climate conference in Paris. The corporations emphasized in their letter that the government, civil society, and industry all had a role to play in combating climate change, and one of the three commitments they disclose was to increase the efforts to make their supply chains more sustainable (WWF, 2016). Five years later, at COP26, an ambitious strategy was announced by 12 of the largest agri-commodity traders including Wilmar and GAR from South-East Asia. They pledged to develop a sectoral roadmap initiative to keep temperature increase within 1.5 degrees. Numerous factors contribute to this trend, including consumer rejection of products that contribute to negative environmental and social outcomes; the naming and shaming of companies that engage in environmentally damaging manufacturing and sourcing processes; and increased investor awareness of market and reputational risks associated with commodity-driven deforestation (Pirard et al., 2015).

A variety of approaches have been implemented to support sustainable supply chain efforts, one of which is the implementation of sustainability standards through commodity certification. The table below maps some of the certifications for the main commodities in Indonesia.

Overview of the Cocoa Commodity Sector

Recent Developments in Global Cocoa Commodity

The modern pleasures offered by chocolates and other related products would not be possible without the humble cocoa beans. Based on flavor and other quality factors, there are two main varieties of cocoa beans: the “bulk” beans generally originating from Forastero trees and the “flavor” beans coming from the Criollo or Trinitario trees (ICCO, n.d.a; ICCO, n.d.b).

In 2018/2019, the world produced and ground 4.7 million tonnes of cocoa beans, with around 1.7 million tonnes in stock (ICCO, 2021). These beans are processed into cocoa liquor, butter, cakes, and powders to be used by other sectors. The confectionery industry is the largest consumer, consuming 43% of the world’s cocoa consumption in 2017 (Eghbal, 2018); other notable consumers are food and beverages, cosmetics, and the pharmaceutical industries (Kumar and Sable, 2019). In 2012, overall, the cocoa sector provided revenue for 40 to 50 million people, mostly in developing countries, and generated jobs in cocoa importing countries (Voora, Bermudez and Larrea, 2019).

The cocoa market is expected to grow by 7.3% annually from 2019 to 2025, reaching $16.32 billion. However, it pales to the size of its downstream industries; in 2017, the retail market value of the chocolate industry was $106.2 billion and is expected to grow to $189.89 billion by 2026 (Voora, Bermudez and Larrea, 2019). This disparity is partly due to the industrial structure of the cocoa supply chain. Cocoa trees require a hot and humid climate and plentiful rainfall found in tropical regions to thrive. Most of the world’s supply now comes from West Africa (particularly Côte d’Ivoire and Ghana), with Indonesia being sixth (Figure 1). Around 5-6 million households on small-scale farms in these equatorial countries grow 90% of the world’s cocoa through a labor-intensive process (Voora, Bermudez and Larrea, 2019). To illustrate, the average farm size in West Africa is around 2-4 hectares, with each hectare producing around 300 – 400 kilograms of cocoa beans (Fairtrade, 2016). Productivity is also an issue; cacao farmers generally only produce 10% of the potential yield under best conditions and practices, while corn farmers can reach 60% of this theoretical yield (Mars, n.d.).

Overview of Palm Oil Commodities and Sustainability Relevance

Indonesia is the largest palm oil country producer with a significant development where there has been an increase in international reserves in the last 10 years.

Based on Directorate General Plantation, Indonesia is able to produce up to 48 million tons of crude palm oil (CPO) in 2018 and it is predicted to reach 50 million tons of CPO in 2021 (see Figure 1). In other words, Indonesia has great potential to develop palm-based biofuel products. The potential of CPO can not only benefit Indonesia economically but also contribute to energy security, emission reduction, and health.

In terms of economy, the palm oil inadustry has significant positive impacts. Based on Coordinating Ministry for Economic Affairs speech on Indonesian National Press Day, the palm oil industry has significantly supported the Indonesian economy during the COVID-19 pandemic through the absorption of 16 million labor and contribution of 3.5% to economic growth (BPDP-KS, 2021)1. Not to mention, the palm oil industry also has a significant contribution to Indonesia’s export. Based on Figure 1, more than 50% of CPO production in Indonesia is exported to other countries for at least the last 12 years with a value of more than US$ 35 million in 20212. The majority of the export of CPO comes from HS Code 15131100 which stands for crude oil of coconut (copra) with a total contribution of 36.87% of total CPO Export (Ministry of Agriculture, 2021).

Moving Towards Green Economy in the Advancement of SDGs

Following the awareness in multiple aspects to support the future of development, new concepts have been established. The Rio+20, which was held in 2012 by the United Nations and attended by global leaderships, have birthed the sustainable development concept, recognizing the issues within the environment and the development in the last few decades that go hand in hand, and therefore can no longer be viewed separately (Lavrinenko et al., 2019)1 . With preserving finance, social responsibility, and environment in mind, the sustainable development concept focuses on “people, prosperity, peace, partnership, and planet”. In 2015, the United Nations classified the concept into seventeen “Sustainable Development Goals” blueprint, grouping the global goals for each specified area.

In the context of economy to support sustainable development, the United Nations Environment Programme (UNEP) led the implementation of “green economy” which focuses on economic growth stemming from investments into activities that allow carbon emission and pollution reduction, social inclusivity, prevention of ecological losses, as well as efficiency of energy and resources. Other than environmental and energy improvement, the green economy also focuses on improving well-being and eradicating poverty. A country’s transition to a green economy could very well be complicated in practice due to the complexity of the existing “traditional” economy which has provided livelihoods to its population—however, looking at the number of environmental and social issues as the implication of the economy, the move forward is now more urgent than ever.

In Indonesia, the national and sub-national government has been highly encouraging the advancement of SDGs and transitioning towards a more holistic approach in addressing the ongoing economic, social, and environmental problems—including but not limited to climate change, loss of freshwater and food resources, social inequality, land conversion, and more.

In April 2020, PT Dharma Satya Nusantara Tbk. (“DSNG”) signed a USD 30.0 million 10-year loan facility from Stichting andgreen.fund (“&Green”), a globally-focused impact investment fund financing sustainable commodity production to protect tropical forests.

DSNG, an Indonesian business group focusing on wood and palm oil sectors, was already known to be committed to the production of certified sustainable palm oil. It had been, for example,
a member of the Roundtable on Sustainable Palm Oil (“RSPO”)2 since 2012. It has also consistently implemented Environmental, Social and Corporate Governance (ESG) as an integral component of its corporate strategy policy in both its palm oil and wood product business segments.

One indication of the company’s commitment was the rise of its ranking in the 2020 SPOTT or Sustainability Policy Transparency Toolkit. DSNG went from 46th in 2019 to 16th in 2020, a big jump that made it the highest ranked Indonesian-headquartered company among the 100 palm oil companies assessed worldwide.3 SPOTT, an initiative developed by the Zoological Society of London assesses the transparency of 100 palm oil companies worldwide regarding their ESG policies.

What is the investment case for sustainable and low-carbon development in sub-national jurisdictions? How could it be realized? What is the structure that is more favorable for investors? What needs to be done at national and sub-national levels to ensure that jurisdictional approach can be well-designed, well-implemented, and well-financed?

This paper shows that jurisdictional approach is an attractive and investable approach when structural and technical imperatives towards its investability are properly addressed. Specifically, the paper addresses the adjustments required to meet the confidence and appetite of investors to invest in jurisdictional approach. Some adjustments may be needed in the structure of the incentives to entice actions to halt deforestation, such as that financial instruments that allows for large-scale financing be managed properly; regulatory instruments that need to be in place to facilitate investor-friendly jurisdictional approach; institutional setting that allows for multi-stakeholder and multi-level planning, implementation, evaluation, and overall governance; and capability to carry out jurisdictional approach at the sub-national level.