The Environmental Fund Management Model in Indonesia: Some Lessons in Legal Regulation and Practice

5.1 Funding and Environmental Fund Management Regulations

As a country influenced by the civil law system, the main legal source of Indonesia is legislation. To regulate the funding and management of environmental capital, a minimum of 3 regulations need to be emphasized. Firstly, Law No. 32 of 2009 concerning Environmental Protection and Management (EPM Law). In this regulation, Article 42 obliged the central and local governments to develop and implement Environmental Economic Instruments (EEI), to preserve the function of the environment. EEI is an economic policy set to encourage the central and local governments or any person toward environmental preservation. Secondly, Government Regulation No. 46 of 2017 concerning Environmental Economic Instruments (EEI Government Regulation). 25 From this policy, 3 important elements were regulated, namely the scope and objectives of EEI, as well as the EFM mandate with the financial management of Public Service Agencies. Article 2 of this Government Regulation also indicates that Environmental Economic Instruments aim to perform the following,

Ensure accountability and compliance with the law.

Moreover, Article 3 regulated the EEI structure, including development planning and economic activities, environmental funding, as well as incentives and disincentives.

Based on the EEI objectives, the funding and management of environmental capital were important measures to prevent, mitigate, and restore ecological functions. Article 20 of EEI Government Regulation subsequently mentioned three environmental funding types, namely a) environmental restoration guarantee fund, b) pollution control/environmental damage and restoration fund, and c) trust/conservation assistance fund. Thirdly, Presidential Regulation No. 77 of 2018 concerning Environmental Fund Management (EFM Presidential Regulation). This regulation systematically regulated the EFM fund as a system and mechanism used to finance environmental protection and management, as well as the EFM objectives, methods, principles of EFM, and implementers. Based on these descriptions, Environmental Fund Management (EFM) aims to preserve the function of the environment through transparent, efficient, effective, proportional, and accountable efforts, as well as building and encouraging public and international confidence.

5.2 Types of Environmental Funding

However, some changes were observed in the funding regulations within the EFM Presidential Regulation. The environmental restoration guarantee fund, previously regulated in Articles 21-25 of the EEI Government Regulation, is no longer governed by the EFM Presidential Regulation. This is due to the revocation and re-regulation of Articles 21-25 by Article 55 of Government Regulation No. 22 of 2021 on the Implementation of Environmental Protection and Management (P3LH Presidential Regulation). The P3LH Presidential Regulation also specifically regulates the Guarantee Fund for the Restoration of Environmental Functions. Furthermore, the guarantee fund is essentially observed as a sum of money deposited by the environmental approval holder (business actor), which should be held in a government bank. From this context, the deposited money is a “guarantee” for implementing environmental restoration/pollution mitigation or other ecological management objectives. 26 In this case, each sector practically applies the mechanism of guarantee funds differently. For example, the reclamation guarantee fund that should be provided by mining activities toward the payment of a specific capital is capable of being returned during the completion of all business restoration programs.

The environmental guarantee fund is also the responsibility and legal capital belonging to the business actor. From a legal perspective, this fund emphasizes a “guarantee”, which provides a lawful certainty regarding the responsibility of the business actor for environmental protection and management. Therefore, this environmental restoration guarantee fund is unable to be included as a financial asset managed by the BPDLH (Indonesian Environmental Fund Management Agency) and/or trustee. The provisions regarding environmental guarantee funds are also an implementation of the polluter pay principle, as stipulated in Articles 2 and 87 of the PPLH law. It states that every responsible party whose business and/or activities cause environmental pollution and/or damage is obliged to bear the cost of restoration. Besides being required to pay compensation, business actors are also ordered by a judge to conduct specific legal actions, such as installing or repairing waste treatment units. In this case, the waste is capable of meeting the environmental quality standards set, restoring societal functions, and eliminating the cause of pollution/destruction. Another concept adopted in the PPLH law is proportionality, asides from the polluter-pay principle. As a country with a geographical condition similar to Indonesia, Malaysia is responsible for including the polluter-pay principle in the Environmental Quality Act 1974-127 amended in 2001. This law regulates several matters related to environmental funds, such as its establishment, committee, contributions, and use. Based on previous studies, pollution control in the palm oil industry is implemented through a combination of a command-control approach and a market-based instrument. The EQA 1974 also indicates the level of charges and penalties for those polluting the environment. 27 Moreover, the practices in Malaysia show that the implementation of the polluter-pay principle is able to reduce environmental pollution. Another financial scheme managed by BPDLH asides from the environmental guarantee budget includes the following, (1) pollution mitigation/damage and environmental restoration fund, and (2) trust/conservation assistance fund. This scheme is developed through a trust model for environmental restoration.

5.3 Activities of Environmental Fund Management

Environmental fund management is carried out transparently, efficiently, effectively, proportionally, and accountably, with the activities consisting of fundraising, as well as capital fertilization and distribution. Table 1 shows the activities, mechanisms, and funding sources of EFM.

The Indonesian government established the BPDLH (Indonesian Environment Fund Agency) to provide continuous funding facilities for environmental protection and management. 28 From this context, several reasons supporting the establishment of the agency were emphasized. Firstly, the commitment of the government to environmental protection and management is manifested through cost allocation, regarding the climate budget tagging conducted by the Ministry of Finance. Climate budget tagging is an important tool for the government to monitor and track their expenses on climate-related activities, with adequate communication of these expenditures to investors. 29 In 2020, the Indonesian government officially prioritized climate change in the Medium-Term Development Plan (RPJMN) 2020-2024, which is the National Priority for Environmental Enhancement. Increased disaster resilience and climate change were also directed through various policies to improve environmental quality, elevate hazardous and climatic adaptability, as well as develop low-carbon initiatives. 30 However, the climate budget tagging allocation in the state budget is relatively small, compared to the need to achieve the Nationally Determined Contribution (NDC) target. This indicates that Indonesia needs an average annual funding of IDR 266.3 trillion until 2030, while the average cost allocation in the state budget for 2020-2022 is around IDR 37.9 trillion. 31

To support climate change policies and efforts, funding is needed for various public and non-public programs/activities. Secondly, until this present period, the environmental fund has not been managed optimally, as the budget is spread across several ministries with various programs in different institutions. This shows that the environmental fund being managed by BPDLH is presently IDR 14.52 trillion. Besides being sourced from the state budget, it also originates from areas, such as (a) reforestation fund, (b) Green Climate-Fund grants for the REDD+RBP project, (c) Ford Foundation grants from the Community-Based TERRA program, (d) World Bank loans for the Disaster Pooling Fund program, (e) Mangrove for Coastal Resilience, and (f) World Bank grants. 32 From this context, the potential funding should be around IDR 24 trillion. Thirdly, the funding from developed countries, regarding environmental protection and management, is strengthening in line with the need for ecological financing in developing nations, which supports the Paris Agreement. Based on these data, a gap is still observed between the fund managed by BPDLH and the total environmental budget needed. This shows that fund accumulation is highly necessary through an appropriate management model. It is also one of the reasons the Indonesian Government establishes BPDLH, which increases and manages environmental fund.

By implementing transparent and accountable EFM, BPDLH is observed as a solution for developed countries to provide funding. 33 Based on the EFM Presidential Regulation, the Pollution Control/Environmental Damage and Recovery Fund and the trust/conservation assistance capital were managed by BPDLH. In addition, 3 objectives were found for the establishment of BPDLH, namely 1) Consolidating various environmental funding sources, 2) Managing environmental funds, and 3) Distributing capital through various instruments for specific supportive projects and activities. This distribution is to improve environmental management and protection, support environmentally friendly economic activities, and reduce GHG emissions. The mechanism for managing environmental funds is carried out through the following schemes,

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Fig. 1

Existing environment Fund manager mechanism. Source: processed from various sources.

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Fig. 2

Suggestion for environment Fund manager mechanism. Source: processed from various sources.

Based on Article 9 of the Presidential Regulation on Environmental Fund Management (Presidential Regulation EFM), BPDLH was likely to appoint and designate a Custodian Bank as a trustee in managing ecological capital. Meanwhile, the regulation should be interpreted by the legislation capable of distinguishing the functions of Custodians and Trust Banks regardless of their banking services development. According to FSA Regulation No. 27/POJK.04/2019 Regarding Approval of Commercial Banks as Custodians, a Custodian Bank was a commercial facility with the permission to provide safekeeping services for securities and other related assets. This included the acquisition of dividends and interest, as well as the representation of account holders/customers. Meanwhile, trust was regulated in FSA Regulation No. 25/2016 regarding Amendment to FSA Regulation No. 27/2015 concerning Trust Management (Trust FSA Regulation). Based on the fundamental differences, a Trust Bank manages assets through the consent of the owner (the settlor), while a Custodian monetary facility is only limited to obtaining and administering the deposit.

Article 9 of the EFM Presidential Regulation was also corrected by the Minister of Finance Regulation No. 124/PMK.05/2020 on the Procedure for Managing Environmental Fund (PMK 124/2020), regarding the differences between Custodian and Trust Banks. In the Indonesian EFM, the use of the trust concept is different from the property law principle in the common legal system. This law involves a fiduciary relationship, as well as the independence and dual ownership of trust property. 34 However, the implementation of this law is confronted by various legal challenges. Firstly, Indonesian trust law does not recognize dual property ownership, regarding an inherent concept feature. In common law jurisdictions, the trust concept is based on recognizing dual ownership, namely the legal trustee and equitable beneficiary properties. This type of ownership is an important feature of trust regarding common law. 35 Compared to trust law in the common law system, the positive policy influenced by the civil law system in Indonesia does not recognize dual ownership, as both legal and beneficial properties are attached to the same constitutional subject. Therefore, the trust law in this country only regulates the joint ownership of property.

Secondly, the trust concept adaptation in Indonesia is carried out through contract law, which provides opportunities and flexibility to develop new agreements with different names. Meanwhile, the Trust concept in the common law system is built on the equity inseparable by policy to develop justice. 36 This shows that the legal relationship in the country’s trust model originates from the agreement developed by the parties. It is also subject to the terms and conditions of the agreement, as regulated in the Indonesian Civil Code. 37 This proves that the parties’ trust agreements emphasize the legal principles of the contract. In civil law countries, the concept of trust is widely and similarly used in the business relationships context. 38 The Trust FSA Regulation issuance in Indonesia also aims to adopt and adapt the principle from the common law system, to support the development of the financial services sector. Based on this regulation, several specific aspects were observed in the use of the trust concept, namely, (1) the trustee is a Bank with specific conditions, (2) only financial assets are managed by the trustee, (3) the legal relationship between the financial asset owner (the settlor) and the trust needs to be developed in a written agreement, (4) financial assets should be separated from the Bank’s possessions as a trustee and be bankruptcy remote. This indicates that the trust asset does not enter the bankruptcy estate, and (5) all the trustee’s legal acts need to be carried out with a written order from the settlor. This shows that the trust concept in Indonesia originates from an agreement between the settlor and trustee, for the benefit of a third party (beneficial owner).

6.1 The Use of the Trust Model in Environmental Fund Management

Environmental fund management in Indonesia involves the following parties,

BPDLH is the implementer of fund management through fundraising, as well as capital fertilization and distribution activities.

The trust model is used when BPDLH, in its fund allocation activities, appoints an intermediary institution (trustee) to transfer capital to the beneficiaries. This model is used when the beneficiaries are unable to access the fund directly. From this context, BPDLH is responsible for the direct distribution of funds to the appropriate beneficiaries. In the EFM, the trust model adaptation needs to consider the following legal aspects,

The basic legal relationship between the parties is an agreement. This includes (a) the agreement between the grantor/donor and BPDLH, (b) the agreement between BPDLH and the Trust Bank, and (c) the contract between the intermediary institution and the beneficiary.

This trust model has a weakness when the purpose of EFM prioritizes the cultivation of environmental fund, which is used to maintain and preserve the environment. This trust agreement model limits the authority of the trustee to manage funds, due to the emphasis of all investment decisions and instrument selection on the written instructions from the settlor (BPDLH). Furthermore, the trustee or intermediary institution is the authorized receiver from the beneficiary based on a contract. This provision deviates from the concept of trust, where the trustee only manages assets for the benefit of the beneficiary, without needing a contract, indicating that the trust model in EFM is yet to provide fund management, especially capital fertilization. Based on EFM regulations, another weakness of the trust model emphasizes the development of an alternative and the provision of authority to BPDLH, to distribute and cultivate funds. In this case, the total implementation of the trust model for fund cultivation is expected to be better than just an option. By entrusting environmental fund management to the trustee, BPDLH needs to focus on obtaining and distributing ecological capital. In addition, the position of the environmental fund, as a trust asset, ends the uncertainty about its status. From these interpretations, the beneficiaries’ regulation regarding Minister of Finance Regulation Number 124/2020 should be understood as the “representative or agent of the environment”. This proves that all cultivation outputs and BPDLH’s environmental fund distribution aim to preserve and protect the environment. The recommended mechanism for using the trust concept in environmental fund management is described as follows,

Based on the proposed mechanism, BPDLH serves as a settlor transferring the management of environmental funds to the trustee, regarding the principles regulated in the Trust Law. As the legal owner, the trustee has a strong legal basis and the flexibility to manage the trust asset according to applicable laws and regulations. In this case, the fund management outputs are greatly implemented for environmental benefits, as the predetermined beneficiary. Since the environmental fund is obtained from the State Budget and donors, its management supervision is carried out by the government or designated institutions based on applicable laws and regulations. Therefore, Indonesian policies show that the institutions socially and commercially managing public funds are under the supervision of the Financial Services Authority.

6.2 Environment as beneficiary (beneficial owner)

The regulation on EFM states that this fund is used to finance environmental protection and management. This shows that the environment is the primary beneficiary of environmental fund management. In this case, the use of the trust model in managing environmental funds should position the environment as the beneficiary. As the beneficial owner, the position of the environment has the consequence of being portrayed as a legal subject. According to Christopher D. Stone (1974), the doctrine of “the environment as a legal subject” was popularized through the discussion that revolutionized the philosophical thinking of law. 39 The landmark case in the new face of environmental legal protection was Sierra Club v Morton (1972). This case was a lawsuit that asserted the first environmental legal standing, where Sierra Club sued the US Forest Service over the ecological damage caused by the Mineral King development near Sequoia National Park in the United States. In this case, one of the judges, William O Douglas, presented a monumental dissenting opinion that triggered a widespread discourse in various countries. This emphasized the assertion of the environment and/or natural resources rights to have legal standing in defending their protection. 40 Furthermore, the development of the environmental personhood concept has become a focus for countries around the world. This is because the granting of legal personality to environmental elements is always carried out to protect nature and its components. As a legal entity or subject, the recognition of the environment has reportedly been a slow process, mostly in the form of judicial statements. Until this present period, many countries such as New Zealand, Bolivia, India, and Ecuador had emerged with various environmental concepts as a judicial personality. 41

Although the Environmental Law in Indonesia did not explicitly state that ecology is a legal entity, the implicit and systematic recognition portraying constitutional existence was still observed. According to Indonesian environmental law expert, Prof Munadjat Danusaputro, “the entire environment was a legal subject unable to be owned by individuals or groups. To provide certainty regarding environmental rights, the law was needed as a foundation to produce legal rights to the environment. By recognizing the environment as a legal entity, everyone was then obliged not to engage in pollution or ecological damage activities”. 42 In the environmental fund management providing financial facilities as a legal protection and management effort, the environment was also a beneficiary. 43 This explains that the regulated “beneficiary” should be interpreted as the representation of the environment. By placing the environment as the beneficiary, the parties representing its existence need to use the environmental fund to benefit the ecosystem, leading to optimal EFM.

6.3 The urgency of the Trust Law as the basis for Trust based activities

Based on the use of trust models in environmental fund management, various regulations and practices were constrained by Indonesia’s legal system, which is influenced by the civil law system. This showed that the implemented trust model was more heavily influenced by the agreement development than the acceptance of the benefaction as a new legal institution. In this case, the legal relationship between the BPDLH, trustee, and beneficiaries should be documented in an agreement. Therefore, the trustee managed the fund based on the regulations governing the management of the environmental fund. This did not align with using a trustee and optimizing management, especially in the fertilizing environmental fund. The individual or institution representing the environment as a beneficiary should also consider an agreement with the trustee. From this context, the trust model entirely limited by the agreement often deviates from the concept of benefaction, where the beneficiary does not require legal efforts to obtain benefits. In this study, the implemented model used the concept of an agreement regulated in Article 1317 of the Civil Code, namely, “a promise for the benefit of a third party, which required the approval of the third party.

Another reason Indonesia needs a trust law is the scattered adoption of benefactions in several regulations for specific purposes. Indonesia had adopted trusts in Presidential Regulation No. 80 of 2011 on the Endowment Fund, before the Trust FSA Regulation in the financial services sector to expand banking services. This regulation was specifically issued to accommodate the grant fund managed by an institution acting as a trustee. Even before the issuance of Presidential Regulation No. 80 of 2011, the grant fund management, through the EFM model, had been recorded since 2005 via the Indonesia Biodiversity Project program sponsored by USAID. The Endowment Fund model was also used in the Aceh disaster response and recovery from 2005-2009, through the establishment of the MDTF (Multi-Donor Trust Fund Aceh). After the enactment of Presidential Regulation No. 80 of 2011, two trustee institutions were subsequently established, namely (1) the Millennium Challenge Corporation, whose establishment in 2013 was to reduce poverty through sustainable economic development 44 , and (2) the Indonesia Climate Change Trust Fund (ICCTF) established in 2014. In this country, the endowment fund was formed by the government obtaining funds from grantors, not directly by the settlor or owner of the property. This led to a transfer of legal responsibility that should be imposed on the settlor to the government.

Indonesia has slowly implemented the trust model for fund management based on its National law. 45 According to the perspective of Mochtar Kusumaatmadja, a neutral legal field unrelated to the cultural and spiritual life of the community should be emphasized in national law development. This is because a law-neutral field is considered more appropriate for renewal, and the implemented foreign models in conceptions, processes, or institutions are always justified. However, the challenges hindering the use of foreign models need to be necessarily considered. Based on these descriptions, the use of the trust concept in Indonesia has undergone an adoption process. 46 The function of the trust institution should subsequently be optimized by applying several equity maxims to banking trust practices in the country. These maxims include the following: 47

He t hat comes to equity should arrive with clean hands: This is one of the most popular maxims of equity, where individuals with bad histories are not allowed to benefit from the wrong they have conducted.

The use of the trust concept is becoming increasingly relevant in Indonesia’s legal system development due to the following reasons:

The trust model adaptation is found in many regulations in the financial services sector, especially in banking and capital markets. The use of this model is implicitly found in several activities in the capital market, such as (a) the investment fund management based on collective contracts, where the investment manager manages all funds for the benefit of unit holders as beneficiaries, and (b) collateral fund management by the Clearing and Guarantee Institution for exchange transactions. For the banking sector, the Trust FSA Regulation also expands the services of financial institutions for them to become trustees. Therefore, all regulations governing trusts are tailored to the Indonesian legal system.