The Role of ESG Services in the Extractive Industry

ESG Integration in the Extractive Industry

  • InCorp Editorial Team
  • 19 June 2024
  • 6 reading time

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.

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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.

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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 Impact
Maximizing 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.

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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.

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.

Get in touch with us.

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Frequent Asked Questions

As their names suggest, the main differences between the three business kinds in Indonesia lie in the businesses and the purpose of their incorporation. Local company owners (PT) must be Indonesian citizens, as even 1 percent of foreign ownership is not allowed. This type of company is not limited to entering any business field, and restrictions on incorporation are not so tight. On the contrary, a foreign-owned company (PT PMA) is open to international investors, but the maximal percentage of foreign shares differs in various business sectors. Contact InCorp to get the most updated information on the Negative Investment List. International investors tend to open representative offices as a first step to understanding the Indonesian market before setting up a limited liability company. This type is used for marketing and promotion activities and needs the right to sell directly and receive income.

Yes, this mainly applies to import and export businesses. Instead of establishing a company, you can use an under-name import service, an importer of record.

It should take between 30 to 45 days.