Learning from Malaysias ESG Tax Incentives: Opportunities and Readiness of Companies in Indonesia

Amidst increasingly complex global business dynamics, the issue of Environment, Social, and Governance (ESG) has transformed from a mere corporate social responsibility (CSR) activity into a fundamental pillar of business strategy. For companies in Indonesia, integrating ESG principles is no longer a choice but a strategic necessity to ensure sustainability, manage risks, and maintain competitiveness in the market. Pressure to adopt ESG comes from various directions, creating an ecosystem that demands accountability and transparency.

This pressure significantly stems from the global investor community. Assets under management in ESG-based investment funds have rapidly increased, and investors are now actively screening their portfolios based on companies ESG performance. Indonesian companies that fail to meet international ESG standards risk losing access to vital funding sources, which could hinder growth and innovation.  

In parallel, domestic regulators are also moving proactively. The Financial Services Authority (OJK) and the Indonesia Stock Exchange (IDX) have become key drivers in creating a more structured ESG framework. OJK Regulation No. 51/POJK.03/2017 concerning the Implementation of Sustainable Finance is a cornerstone, mandating financial service institutions, issuers, and public companies to develop action plans and publish sustainability reports. This move is reinforced by the IDXs launch of the ESG Reporting platform in January 2025, which targets full implementation by May 2025. This platform signals a new era where structured and standardized ESG data disclosure becomes an obligation, no longer a voluntary act.  

This push comes not only from regulators and investors but also from the market itself. Public awareness and consumer preferences show a clear trend. A survey revealed that over 70% of Indonesian consumers are more likely to buy products from companies that demonstrate socially and environmentally responsible business practices. This directly links ESG performance to brand reputation, customer loyalty, and, ultimately, company revenue.  

This convergence of regulatory push (the "stick" policy) and market pull (the "pull" demand) has brought ESG in Indonesia to a critical juncture. Companies are no longer asking if they should adopt ESG, but how to implement it effectively, efficiently, and affordably. This dilemma arises because, on one hand, companies face high implementation costs and complexity, while on the other, the cost of inaction—in the form of lost access to capital and customer trust—is far greater. This "squeezed" situation opens an ideal policy window for fiscal instruments. Tax incentives, or the "carrot" policy, can be a powerful accelerator to bridge the gap between compliance demands and the financial realities faced by companies. In this context, the policy implemented by our neighboring country, Malaysia, offers a highly relevant and timely case study.

Case Study: Dissecting Malaysias Comprehensive ESG Tax Incentives

The Malaysian government has introduced a fiscal incentive framework designed to encourage widespread ESG adoption. Through the Income Tax (Deduction for Expenditure in relation to Environmental Preservation, Social and Governance) Rules 2025, which applies for fiscal years 2024 to 2027, Malaysia has signaled that investing in sustainability is a national priority. The policy offers a tax deduction on adjusted income for various types of ESG-related expenditure, capped at RM50,000 per fiscal year.

One of the most significant aspects of this policy is its very broad scope. The incentives are not only targeted at large or listed companies, but also include financial institutions, private companies, Labuan companies, and Micro, Small and Medium Enterprises (MSMEs). This inclusive approach demonstrates the understanding that a sustainable business ecosystem can only be built if all actors, regardless of scale, are empowered to participate. These incentives not only focus on the "Green" or environmental aspects, but also on the Governance aspect and support digitalization and technological innovation in MSMEs. These costs include:

1. Fees for ESG reporting by Financial Institutions supervised by Bank Negara or companies listed on Bursa Malaysia. These fees are in the form of:

1. Validation, verification and certification of ESG practices

2. Calculation and tracking of Greenhouse Gas (GHG) emissions and ESG Exposure

3. Technology or software subscriptions for data collection and use of ESG metrics

4. Technology or software subscriptions for risk management, scenario analysis and GHG emissions calculations

5. Capacity building, including training, education and skills development for employees; and

6. Consultant or expert services to carry out the above activities

2. Charges by Labuan companies or companies for:

1. Preparation of reports in accordance with the “Tax Corporate Governance Framework” (TCGF) guidelines and appointment of an Independent Reviewer to assess compliance with these guidelines

2. Preparation of contemporary transfer pricing (TP) documentation

3. Consulting fees by MSMEs for custom software development in implementing electronic invoices and obtaining external service providers, but not including:

1. Expenditures at the planning stage or preliminary procedures for the provision of the software

2. consulting costs related to issuing invoices through the MyInvoice Portal

When viewed holistically, Malaysia’s tax incentives are not just “environmental incentives” but rather incentives for business transformation and governance strengthening framed within the ESG agenda. The Malaysian government seems to recognize that credible ESG reporting (as an output) is impossible without a strong foundation of accurate data, transparent governance, and robust digital infrastructure (as inputs).

The inclusion of TCGF and transfer pricing documentation as deductible expenses is a smart move. It effectively links the ESG agenda to the tax compliance agenda. By subsidizing the cost of implementing TCGF and TP, the Malaysian government is indirectly encouraging good governance practices and tax transparency, which are part of the “G” pillar of ESG.

Furthermore, the specific incentive for MSMEs to use e-invoicing is a strategic move that links ESG adoption to the national digital transformation agenda. This not only helps MSMEs modernize their financial operations but also makes them more reliable and integrated suppliers in the increasingly digitalized supply chains of larger companies. Thus, Malaysia is playing a “long game”, building fundamental capacities from the bottom up to ensure the success of its national sustainability agenda.

Indonesias ESG Landscape: Strong Regulations, But Fiscal Incentives Awaited

In contrast to Malaysias approach of balancing obligations with incentives, the ESG landscape in Indonesia is currently dominated by a compliance-driven framework. The government and regulators have successfully built a strong regulatory foundation to promote transparency and accountability, but supportive and broad-based fiscal instruments are still awaited by the business community.

The regulatory framework in Indonesia is built on several key pillars. OJK Regulation No. 51/POJK.03/2017 serves as the cornerstone, explicitly requiring Financial Service Institutions (FSIs), Issuers, and Public Companies to implement sustainable finance. This obligation includes preparing a Sustainable Finance Action Plan (RAKB) and publishing a Sustainability Report integrated with the annual report.  

The IDX also plays a crucial role as an agent of change. Besides launching various ESG-based indices like the IDX ESG Leaders to provide a benchmark for investors, the IDX also collaborates with global rating agencies like Morningstar Sustainalytics to provide ESG scores for listed companies. The culmination of these efforts is the launch of the ESG Reporting platform in January 2025, a centralized system requiring issuers to report their ESG data in a structured manner. This platform adopts the ASEAN Exchanges Common ESG Metrics, demonstrating Indonesias commitment to aligning with regional standards.  

Beyond the capital market, Indonesia has also ratified the Paris Agreement through Law No. 16 of 2016 and launched a carbon exchange regulated under OJK Regulation No. 14 of 2023, creating a market mechanism for emissions control. This series of policies shows Indonesias seriousness in its sustainability agenda.  

However, amidst this strong regulatory framework, one element feels missing: comprehensive and cross-sectoral fiscal incentives. Although there are some specific incentives for certain sectors, such as renewable energy , there is no broad tax deduction scheme to help companies bear the general costs of ESG adoption, such as consulting fees, report verification, investment in data collection technology, or employee training. This absence of fiscal support creates a "cart before the horse" situation, where demands and expectations have been set high, but the support to achieve them remains limited.  

The need for these incentives is not just a discourse but a real aspiration from industry players. Large companies like PT Semen Indonesia (SIG) have openly proposed that the government provide more tax incentives for companies committed to ESG. This indicates that the cost burden of ESG implementation is a real challenge felt by the business world.  

A comparison of the approaches between Malaysia and Indonesia can be summarized in the following table:

Table 1: ESG Framework Comparison: Malaysias Fiscal Incentives vs. Indonesias Regulations

This table clearly illustrates the difference in policy philosophy. While Indonesia focuses on building a foundation of compliance through the "stick" of regulation, Malaysia complements it with the "carrot" of incentives to accelerate adoption and ease the transition burden.

Opportunities and Readiness: The Dilemma for Indonesian Companies

The presence of tax incentives like those implemented in Malaysia would open up significant opportunities for companies in Indonesia. However, these opportunities are met with the reality of varied internal readiness among companies. This creates a dilemma: how to maximize opportunities while overcoming existing readiness challenges?

Part A: Wide Open Opportunities

If Indonesia were to adopt a similar fiscal incentive scheme, several significant opportunities could open up for the national business ecosystem.

First and foremost is lowering the barriers to ESG adoption. One of the biggest challenges facing companies, especially MSMEs, is the high implementation cost. These costs include consultant fees for report preparation, investment in new systems and technology, certification and verification fees, and employee training programs. Tax incentives targeting these expenditures would directly reduce the financial burden, making ESG adoption more affordable and allowing companies to allocate resources to more substantive sustainability initiatives.  

Second, incentives can unlock the potential of MSMEs. MSMEs are the backbone of the Indonesian economy, yet they are also the most vulnerable to resource constraints. On the other hand, multinational corporations (MNCs) and large corporations are increasingly demanding ESG compliance from their entire supply chains. Without support, MSMEs risk being excluded from global supply chains. Incentives specifically designed for MSMEs—like Malaysias support for e-invoicing software—can help them meet these standards. This would transform ESG from a compliance burden into a competitive advantage, enabling MSMEs not only to survive but also to thrive by accessing new markets.  

Third, incentives can drive deeper ESG integration. With mandatory reporting, there is a risk of "tick-the-box" practices or greenwashing, where companies focus only on meeting minimum paper requirements without fundamental changes. Smartly designed incentives, such as those subsidizing governance strengthening (TCGF) and investment in data systems, would encourage companies to build a solid ESG foundation. This would accelerate authentic, systemic change rather than superficial compliance.

Part B: The Reality of Readiness and On-the-Ground Challenges

Although data shows a high level of ESG adoption on paper—one report mentioned that 95% of companies in Indonesia have adopted ESG to increase corporate value —the reality on the ground presents a more complex and challenging picture. The readiness of Indonesian companies, especially outside the top-tier public companies, remains a major task.  

Several fundamental challenges still hinder effective ESG implementation:

• Lack of Awareness and Understanding: Many companies, particularly at the medium and small levels, still have a limited understanding of ESG. The concept is often misinterpreted as merely environmental programs or CSR, whereas it encompasses complex social and governance aspects.  

• Resource and Cost Constraints: This is the most frequently cited challenge. ESG implementation requires significant upfront investment in technology, expertise, and process changes, which is a major barrier for companies with limited financial capacity.  

• Data Gaps and Transparency: Many companies do not yet have adequate systems to collect, manage, analyze, and report ESG data accurately and consistently. This makes meeting the reporting obligations on the new IDX platform a significant technical challenge.  

• Human Resource Deficit: There is a scarcity of talent with specific expertise in the ESG field. Formulating, managing, and reporting on ESG initiatives require a multidisciplinary understanding that is not yet widely available. One survey even showed that 60% of MSMEs in Southeast Asia find it difficult to recruit staff for sustainability roles.  

• Immature Business Culture: A business culture that is still heavily oriented towards short-term profits often clashes with the long-term investment logic that underpins ESG. A lack of commitment from top leadership is a major obstacle to driving the necessary cultural change.  

The combination of high regulatory demands and fundamental readiness challenges creates a dangerous "readiness gap." Large, publicly listed companies may have the resources to adapt, but the majority of Indonesias business ecosystem, especially the MSMEs that support the supply chain, are not yet ready.

If Indonesia were to design a "one-size-fits-all" tax incentive that only targets advanced ESG activities (e.g., complex Scope 3 emissions calculations or subscriptions to expensive global data platforms), then only large corporations would be able to benefit. Consequently, public funds (through tax deductions) would flow to the most capable entities, while the MSMEs that need help the most would be left behind. This would create a "Matthew Effect" in ESG adoption—where the rich get richer—and would widen the competitive gap between large corporations and MSMEs. Therefore, any future incentive scheme must learn from Malaysias tiered approach, with specific, easily accessible support designed for the needs of MSMEs.

Policy Direction and The Path Forward for Indonesia

Looking at the Malaysian case study and domestic conditions, Indonesia is at a strategic crossroads. To accelerate the sustainability agenda effectively and inclusively, concrete steps are needed from both policymakers and the business community itself. The goal is not to blindly copy another countrys policy, but to adapt its best principles to Indonesias unique context.

Recommendations for Policymakers

1. Design Holistic and Tiered Incentives: The government should consider designing a fiscal incentive scheme that goes beyond just "green" projects. Learning from Malaysia, an effective incentive must cover three pillars: (1) Transparency, by supporting reporting, verification, and certification costs; (2) Governance, by providing incentives for adopting frameworks like TCGF and other tax compliance measures; and (3) Digitalization, by helping companies, especially MSMEs, invest in the necessary data systems and technology.

2. Prioritize MSME Empowerment: To address the "readiness gap," there must be an incentive pathway specifically designed for MSMEs. This could take the form of tax deductions for more fundamental costs, such as participation in certified ESG training, subscriptions to simple reporting software, or fees for obtaining initial certifications. The goal is to lower the entry barrier for small business players.

3. Connect with Other National Agendas: ESG incentives can be a powerful policy tool to achieve other national goals. By providing incentives for strengthening tax governance (TCGF), the government can increase voluntary tax compliance. By supporting MSME digitalization, the government accelerates the digital economy agenda. This integrated approach will create a greater multiplier effect.

4. Adopt Global Best Practices: The use of tax instruments to promote ESG is not new. Other countries like the Philippines and Australia have also implemented various incentives, from tax holidays to special VAT rates for renewable energy. Indonesia can study these various models to design the most suitable policy.  

Recommendations for Businesses

1. Dont Wait for Incentives: While fiscal incentives are highly anticipated, pressure from regulators and the market is already a current reality. Delaying ESG adoption while waiting for incentives is a high-risk strategy. Proactive companies will build a competitive advantage that is difficult to catch up to.

2. Start with the Foundation: Governance ("G"): The "G" pillar is the foundation of credible ESG. Before making large investments in complex environmental projects, ensure the company has solid internal control systems, risk management, and data governance. Good governance will ensure that the "E" and "S" initiatives undertaken can be accurately measured, managed, and reported.

3. Shift Perspective: ESG as an Investment, Not a Cost: Instead of viewing ESG as a cost center, companies should frame it as a strategic investment. The benefits are tangible, ranging from mitigating regulatory and reputational risks, improving operational efficiency, attracting and retaining top talent, to opening access to new markets and funding sources.  

4. Seek Expert Guidance: The ESG landscape is highly complex and constantly evolving. Navigating the technical requirements of reporting, implementing data systems, strengthening governance, and its tax implications requires specialized expertise that may not be available in-house. Partnering with expert consultants can help companies avoid costly mistakes and accelerate their ESG journey.

Navigating ESG and Tax Complexity with BATS Consulting

As outlined in this analysis, the journey towards effective ESG integration is fraught with challenges. Companies in Indonesia face the daunting task of navigating complex regulations like POJK 51/2017 and new reporting standards from the IDX, while striving to strengthen their corporate and tax governance frameworks. At this intersection of sustainability, compliance, and fiscal strategy, integrated expertise is not just helpful—its essential.

At BATS Consulting, we understand that each ESG pillar is interconnected and has profound implications for your companys financial and operational health. Our team of experts in tax, governance, and sustainability is ready to be your strategic partner in turning ESG challenges into a competitive advantage.

We offer an integrated suite of services specifically designed to address the challenges discussed:

• ESG Reporting & Assurance: We help you develop robust, data-driven, and credible sustainability reports that not only meet OJK and IDX standards but also answer investor expectations.

• Tax Corporate Governance Framework (TCGF) Advisory: Inspired by the best practices highlighted in Malaysias incentive model, we guide you in designing and implementing a TCGF to strengthen the "Governance" pillar, proactively manage tax risks, and demonstrate your commitment to ethical business practices.

• Transfer Pricing & Tax Compliance: Our experts ensure your transfer pricing documentation is compliant and robust, a crucial component of good governance and the "G" pillar in ESG.

• Strategic ESG & Tax Planning: We help you understand the financial implications of every sustainability initiative, identify potential fiscal efficiencies, and prepare your company to welcome the future incentive landscape.

Dont navigate this complex journey alone. Partner with BATS Consulting to transform your ESG challenges into long-term value. Contact us today for a comprehensive consultation and let us help you build a sustainable and resilient future for your business.

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About BATS Consulting

BATS Consulting is a leading strategic consulting firm in Indonesia, delivering comprehensive solutions in accounting, taxation, finance, legal, and sustainability (ESG). With an internationally experienced team and a data-driven approach, BATS empowers clients across industries to improve compliance, operational efficiency, and long-term growth strategies. Our core services include transfer pricing, tax audits, M&A advisory, carbon emission management, and carbon credit markets—positioning BATS as a trusted partner for today’s complex business challenges.

With the principle of "global insight with local relevance," BATS Consulting delivers tailored solutions that meet international standards while addressing local regulatory nuances. Based in Jakarta, we are the preferred consulting partner for national and multinational companies seeking sustainable competitive advantage. Whatever your business challenge, BATS stands ready as a strategic and adaptive partner to lead you toward success.

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