Home Blog ESG Integration in the Extractive Industry Company Registration | ESG Advisory | Indonesia ESG Integration in the Extractive Industry InCorp Editorial Team 19 June 2024 6 minutes reading time Table of Contents What is the Extractive Industry? The Types of Extractive Industries Key Players in the Extractive Industries The Impact of Extractive Activities Sustainability Initiatives in Extractive Industries Start Implementing ESG with InCorp Indonesia The extractive industry, which encompasses mining, oil, and gas extraction, is pivotal in the global economy. This massive industry offers valuable natural resources that power various sectors. However, the operational side often raises environmental, social, and governance (ESG) concerns. Therefore, ESG reporting has become an essential tool for ensuring ethical operations, especially in this era. Not only that, ESG implementation in the extractive industry will also open profitable opportunities in your business practices. What is the Extractive Industry? Extractive industries refer to businesses that engage in managing natural resources. Their operations encompass the extraction of raw materials up to the production phase in factories. Extractive enterprises are usually located in resource-rich regions. The chosen locations often have sufficient raw materials to meet the production equipment requirement. This necessitates business operators to understand the environmental conditions of natural resources. The comprehensive plan will ensure the preservation and sustainability of raw material stocks. In addition to acquiring and processing natural resources, extractive businesses are responsible for preserving and utilizing natural resources to create products beneficial to humans. READ MORE:5 Ways To Integrate ESG Investing into Business Growth The Types of Extractive Industries If we look at the processes and activities, extractive industries possess unique features that set them apart from other enterprises. One is the “utilization of natural resources,” where extractive businesses focus on harnessing natural resources for processing into valuable products. Another characteristic is “direct extraction from nature,” which involves processing natural resources into end products. Given that these businesses deal with natural resource processing, each type of extractive business has different processing methods and end products. Based on their sectors of activity, here are some types of extractive businesses: 1. Agriculture Various crops and agricultural products are the focus of extractive businesses in this field. 2. Livestock The extractive industry also encompasses livestock farming, where farm animals are processed and utilized. Types of livestock used in extractive industries include goats, cows, chickens, and more. 3. Plantations Plantations yield raw materials from specific crops that are processed into valuable products. Proper management is crucial for optimal results. 4. Marine Fisheries The rich marine life is a resource for the extractive industry in marine fisheries. Activities include catching, packaging, and distributing fish. 5. Salt Manufacturing Seawater can be processed into salt by drying it into crystals or land-based mining. 6. Forestry Extractive businesses in forestry utilize forest resources for processing various products such as paper, furniture, and construction materials. 7. Mining The mining sector involves exploring and processing mineral resources like copper, gold, coal, petroleum, and natural gas. Key Players in the Extractive Industries The key stakeholders in the extractive industry that business should engage are: 1. Employees, Partners, and Contractors These people work directly with the company or have a business relationship. They are often overlooked, but it is essential to maintain a positive relationship with them as it can impact how the community sees the company. 2. Communities near Mining Sites To gain community support, companies must show that the benefits of a project outweigh the risks. This involves engaging with community members, addressing their concerns, and planning for the community’s long-term future together. 3. Environmental Advocates Engaging with groups that may oppose mining projects can be difficult. Still, it is essential for understanding different viewpoints and addressing concerns, even if both sides do not change their stance. 4. Small-Scale Miners Small-scale or artisanal miners traditionally used many areas before large-scale mines arrived. 5. Agriculture Industry and Farmers Extractive companies can collaborate with agriculture to tackle water shortages and quality issues. 6. Government The government plays a role as a regulator and receives royalties from the extractive industry. Sometimes, the government is responsible for providing community services, so businesses should understand government priorities and roles in maintaining and funding community projects. 7. Indigenous Communities Indigenous peoples have special rights to their land and resources. Because of these rights and the unique impacts mining can have on them, companies should be incredibly considerate when engaging and seek free, prior, and informed consent (FPIC) through consultation. READ MORE:Is The ESG Implementation Strategy Beneficial For Business? The Impact of Extractive Activities The government plays a role as a regulator and receives royalties from mining. Sometimes, the government also sets environmental standards and monitors compliance, ensuring responsible extraction practices in the extractive industry. Here, we’ll explore the impact from both economic and environmental aspects. Economic ImpactEnvironmental ImpactMaximizing Natural Resources’ Potential:The primary purpose of this economic activity is to process natural resources into valuable products.Resource Depletion:Extractive activities can lead to the depletion of finite natural resources, which can have long-term consequences for future generations.Creating Job Opportunities:Extractive businesses can generate new job opportunities, helping to reduce unemployment rates.Ecosystem Disruption:Mining and drilling can disrupt ecosystems, destroying habitat, soil erosion, and biodiversity loss.Increasing Profits:Harnessing and processing natural resources often produces substantial profits for companies engaged in extractive activities.Pollution & Climate Change:Releasing pollutants, such as greenhouse gases and the extraction of fossil fuels, can contribute to climate change, air and water pollution, affecting human and environmental health.Providing An Alternative:Products derived from natural resource processing can serve as substitutes for various needs, allowing people to fulfill their requirements.Water Usage & Generation:Extractive activities often require significant water usage and generate waste and tailings, which can strain local water resources, impact nearby communities, and pose environmental risks if not properly managed. Sustainability Initiatives in Extractive Industries Based on the United Nations document “Transforming Extractive Industries for Sustainable Development,” transforming the extractives sector can be divided into six areas, namely: Financing for development: debt, liquidity, taxation, and illicit financial flows. Governance and revenue management. The green economy. A just transition to sustainable systems. Technology, innovation, and a circular economy; and Regional and global collaboration. Guide to Doing Business in Jakarta Mailchimp Free eBook Indonesia Business Insight Contact Full NameEmail I have read InCorp's Privacy Policy and agree to InCorp using my information provided to contact me about related content, and services.*Subscribe Start Implementing ESG with InCorp Indonesia The extractive industry offers various economic benefits, including job creation and increased national profits through natural resource processing. Integrating sustainability consulting can help your extractive business thrive, ensuring financial success and minimal environmental impact. In this regard, InCorp Indonesia can support your business by offering ESG advisory and company registration services. These services will guide your business through the complex process of ESG integration and ensure alignment with relevant regulations. Read Full Bio Verified by Daris Salam COO Indonesia at InCorp Indonesia With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships. Frequently Asked Questions Does a PMA company in Indonesia have to meet certain criteria before it can distribute dividends? Dividends can be distributed from company net profits after allocating reserves, depending on a positive profit balance. Approval from the general meeting of shareholders is necessary. Interim dividends may be distributed if specific requirements are met. How A PMA company can be eligible to conduct import activities? What licenses and procedures are necessary while engaging in import-related activities? A PMA company in Indonesia must obtain an NIB, which also functions as: Importer Identification Number (Angka Pengenal Impor or API) Producer Importer Identification Number (Angka Pengenal Impor Produsen or API-P), which is required for the import of machinery and equipment, goods, and materials used in production. General Importer Identification Number (Angka Pengenal Impor Umum or API-U), which is required for the import of specific goods for trading purposes, is grouped under one section in the Customs Classification System. Customs Identification Number (Nomor Identitas Kepabeanan or NIK), It functions as an identifying document for the applicable Customs and Excise authorities during the customs clearance process. Some goods may face limitations or restrictions on importation in Indonesia, potentially requiring additional approval from the Ministry of Trade. Recommendations from technical ministries like Industry or Agriculture may influence these approvals. Are there investment facilities provided for foreign investors in Indonesia? A newly established PMA company in Indonesia is typically provided with import facilities, tax holidays, tax allowances, or investment allowances. Import facilities Investors in Indonesia, particularly in manufacturing, may benefit from import tax exemptions for capital goods and raw materials through the Master List Facility. The imported goods must meet specific criteria, such as not being produced locally or not meeting industry demand despite local production. Tax holiday The government offers CIT reductions of 50% or 100% for 5–20 years for listed pioneer industries, based on investment value. After this period, a CIT reduction of 25% or 50% applies for two fiscal years. Non-listed sectors can also apply by meeting criteria demonstrating pioneer industry status. Pioneer industries are industries that have a wide range of connections, provide additional value and high externalities, introduce new technologies, and have strategic value for the national economy. Tax allowance For companies in certain designated areas or regions, the government may provide the following tax concessions: Net income reduction up to 30% of the amount invested, prorated at 5% annually for six years, on condition that the assets invested are retained for the same duration. Accelerated depreciation and/or amortisation deductions An extension of tax losses carried forward for a maximum of ten years A 10% (or lower if treaty relief is available) withholding tax rate on dividends paid to non-residents The applicant eligible has to meet high-level-criteria for the above tax facilities: High investment value or for export purposes High manpower absorption High level of local content Investment allowance The government offers a reduction in net income of up to 60% of the investment, distributed at 5% annually over six years of commercial production, contingent upon the retention of invested assets for the same duration. To qualify, applicants must meet business line eligibility criteria and employ a minimum of 300 Indonesian workers in the project. Super deduction This facility could be granted to certain businesses, such as: 60% reduction in net income of the amount of tangible fixed assets invested for labor-intensive industries, distributed throughout a certain time frame. Up to 200% reduction in the gross income of the amount spent for human resources development in certain competency activities. Up to 300% reduction in gross income of the amount spent for certain R&D activities in Indonesia. What is the Indonesian employment status in PMA company? In Indonesia, employment arrangements are categorized into temporary employment agreements (PKWT) and permanent employment agreements (PKWTT). Temporary contracts are for short-term, seasonal, or experimental work, while permanent contracts are for continuous employment. Get in touch with us. 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