Startups and digital innovation have caused significant societal changes in the new millennium. However, as businesses navigate the ever-evolving digital landscape, they must prioritise responsible and sustainable practices and note that the digital economy’s advancement will also bring carbon emissions. For Southeast Asia, no less than 20MT of emissions by 2030 is expected to be coughed up due to this transformation.
Modern companies, both digital and traditional, have identified wasteful energy, higher carbon emissions and inequality in pay and gender diversity as liability for business since it invites unwanted attention from investors, government, and society. In 2004, the United Nations Principle of Responsible Innovation (UN PRI) introduced the Environmental, Social and Governance framework to bridge the gap between’ business-as-usual’ to sustainability operations. Under the directive of UN Secretary General Kofi Anan, policymakers were encouraged to develop regulations that support accountability, formulate specific standards of ESG for companies, and advise investors to request and reward ESG practices in well-managed companies (United Nations, 2004). By adopting the ESG principles, companies are expected to provide a regular ESG or sustainable report detailing their business achievements and progress.
In order to ensure a sustainable digital transformation, companies must focus on building a green and organic economy that leverages their innovative strengths and business ecosystems. This is especially important given the growing challenge of digitising the world. Businesses can benefit their reputation and the future by prioritising sustainability and diversity.
Flash forward to this decade, as a G20 member, Indonesia’s digital economic value in 2022 is recorded at US$ 77 billion and could reach US$ 130 billion in 2025. The country’s digital economy was primarily driven by e-commerce and startups catering for transport, food delivery, travel and media; this valuation puts Indonesia as the forefront runner of Southeast Asia’s digital economy.
The Indonesian government has multiple times made statements and programs to reduce carbon emissions by agreeing to the Paris Agreement’s objective and implementing mainstream green funding, sustainability bond and ESG-index in the stock market. This spurs tech investors to seek out companies with ESG principles and climate change actions, thus providing an excellent financial push for startups to adopt sustainability principles.
Indonesian startups have begun adopting ESG principles and Sustainable Development Goals (SDGs) into their core operation. To name a few are the sustainable fisheries e-commerce Aruna, solar startup Xurya, and the super-app Gojek and Tokopedia (GoTo).
Aruna streamlines the supply chain of fishery products by connecting small-scale fishermen to the global market through technology partners. The company recently partnered with the MIT Sloan School of Management Global Entrepreneurship Lab Program (G-Lab) to do a comparative analysis of the concept and implementation of ESG in the fishery industry. Energy startup Xurya provide service in constructing solar panel for commercial and industry. GoTo has shared commitment to reach Zero Emissions, Zero Waste, and Zero Barriers by 2030.
As a nascent industry, startups have an advantage over larger companies whose legacy infrastructure of assets, products, and culture often needs to be undone to be consistent with ESG principles. Startups have more flexibility to build their operation around ESG principles from the start by implementing the social and governance aspect into talent attraction and retention strategies, regulatory intervention, and environmental awareness into the startup’s identity as early as possible. Thus by grasping the core principles of ESG as part of their services, these startups may insert themselves as the new champion for sustainable digital transformation and chain supply that affirms with the SDGs goal.
Aside from their ESG-related and SDG goals businesses, these startups has one similiraties, in which they receive funding from East Ventures, a venture capital (VC) firm from Indonesia that became the first Indonesian VC to join the UN PRI signatories. By becoming part of the UN PRI organisation, companies are committed to pursuing ESG integration and responsible investment practices that aligns with the Sustainable Development Goals (SDGs).
However, despite the popularities of the ESG principles Indonesia, the country ranked fifth among ASEAN countries in terms of sustainability disclosure rate (Ismail et al., 2022) and classified as a “country in the early-stage framework” on ESG regulation (Singhania & Saini, 2022). Indonesian companies faces challenges when adopting the ESG principle due to the lack of national policy and one-agreed standard to define and evaluate ESG performance in the country; often this caused multistakeholder to dismiss sustainability reporting and opt out in putting ESG issues into their priority.
Another argument is that, Indonesian companies tend to focuses on the social and government pillar as it relates more directly to business operation, as opposed to environmental causes which tends to require large investment in green technology and green infrastructure.
Tamara & Budiman’s (2022) discovered the low rate of ESG adoption in Indonesian corporate and investors were due to failure to see the merit of socially responsible investment (SRI) principles. The finding is in line with Ismail et al., (2022), who compared Indonesia and Malaysia’s ESG adoption and found that in both countries, companies with low ESG disclosure tend to focus more on disclosing governance information (Ismail et al., 2022) to solve an existing problem between firms’ management and shareholders, compared to developing activities for the social and environment pillar.
Moreover, adopting ESG principles can be costly. The U.S. Securities and Exchange Commission (SEC) calculated that corporate issuers, on average, spent US$677,000 annually on climate-related disclosures. A majority of the cost was used to analyze greenhouse gas (GHG) emissions, climate scenario analysis, and internal climate risk management controls; the first two were mainly for disclosure and reporting activities, while the last one is related to . Startups at the seeding stage will find it difficult to allocate significant capital and manpower to prepare all the required sustainability disclosures.
To sum it up, green funding and sustainability reporting from investors, such as venture capitalist, may pave the way for startups to switch their operations into more sustainable and sensitive to environmental, social and governance challenges. However, the costly sustainability reporting may hamper this initiative. Without regulatory and financial aid support, it will be difficult to urge corporate stakeholders to implement a sustainable digital transformation and roadmaps.