London Calling: Not seeing the wood for the fees
Published by MAC on 2006-05-18
London Calling: Not seeing the wood for the fees
by Nostromo Research
18th May 2006
These days, reports on corporate social responsibility rattle out at a rate of knots. They clamour for our response even though they say little substantially new. But, as a staffer for London-based Control Risks Group told a business seminar about ten years back: "So long as you keep your opponents talking, you're okay. The moment they refuse to dialogue - watch your back!" (We may not have the exact words, but we certainly carry the right gist).
So it's fairly refreshing to find an offering which, though funded by the European Commission and Tony Bliar's Department for International Development (DfID), hits where most previous studies haven't.
The new report is by Indonesian based CIFOR. Okay, so it's on timber and pulp, but it's far from papier mache. And it has a definite relevance to mining, demonstrating that:
* international investors have banked billions on unsustainable timber projects without performing due diligence;
* the World Bank's IFC has skimped environmental appraisal of projects it proceeds to support;
* at least one least one investment bank, heavy into mining, has backed a project which is probably environmentally unsustainable. (That's Merrill Lynch);
* the "Equator Principles" - to which some forty-one international banks now subscribe - don't cover most of the loans and bonds used to finance expansion of pulp mills. The principles must, says the study's coordinator, "be broadened to cover syndicated loans, and issues of notes, bonds and equity, as well as project finance."
And, of course, that's of distinct relevance to mining, since banks often manage bond issues which are then converted into inequitable equity for a renegade mining company.
A recent example of this is Barclays Capital running a bond issue for Vedanta so it can
fund its predatory new aluminium refinery in Orissa.
Crossing the Equator
CIFOR also praises ABNAmro for "agree[ing] not to finance the clearing of primary forest or the purchase of illegally harvested timber."
But, hang on a moment - wasn't ABNAmro one of the lead banks that launched the disreputable Vedanta in the first place? And have they ever repudiated banking on this awful UK company after it illegally cleared primary forest for its Lanjigarh refinery site? (The answer - if you didn't know already - is a resounding "Nahin!")
The day the CIFOR study was launched, US-based Rainforest Action Group gave a "virtual" award to the leading Dutch Bank for "outstanding environmental hypocrisy". ABNAmro is accused of backing the Sakhalin II oil and gas project in Russia's Far East - one of the "most environmentally and socially destructive projects in history".
There's an even greater irony here. Just four months ago BankTrack (which also recently condemned the Sakhalin II project) along with WWF published their own estimate of how banks had met the (fairly relaxed) requirements of the Equator Principles. It gave ABNAmro the highest rating among the forty-one banks for fulfilling at least some of those principles with regard to “environmental and social management” in extractive industries. *
God only knows where this leaves the rest of the recalcitrant international funders.
Or indeed where it leaves DfID as co-sponsor of the CIFOR report. For, if there's one thing the UK's "development agency" never deigns to criticise, it's British-based extractive companies.
And those dastards, Vedanta, are key among them.
* See “Shaping the future of Sustainable Finance”, WWF-UK, in association with BankTrack, Godalming, January 26 2006
Investors Risk Losing Billions on Environmentally Destructive Pulp Mills
JAKARTA, Indonesia, (ENS)
12th May 2006
Incorrect assumptions about the origins and the cost of wood used in emerging market pulp mills has led international investors to channel tens of billions of dollars worldwide into financially risky and environmentally destructive ventures, finds an analysis of 67 pulp mill projects released Thursday by the Indonesia-based Center for International Forestry Research (CIFOR).
The CIFOR report, entitled "Financing Pulp Mills: An Appraisal of Risk Assessment and Safeguard Procedures," was funded by the European Commission and the United Kingdom's Department for International Development.
"Financial institutions have shown a surprising lack of interest in understanding how the pulp companies requesting loans are going to get all this cheap wood," said David Kaimowitz, director general of CIFOR. "In reality, some of these mills have vastly overestimated what's legally available from timber plantations. So the only way they can meet production targets is through unsustainable logging of natural forests or by shipping in wood from distant sources at a much higher cost."
The study warns that a lack of due diligence in the expanding global pulp sector may lead to a new wave of ill-advised projects, setting up investors, forest-dependent communities, and the environment for a precipitous fall.
CIFOR's researchers found that two companies in Indonesia, Asia Pulp & Paper (APP) and Asia Pacific Resources International Ltd. (APRIL), are clear instances in which financial institutions failed to conduct proper due diligence on fiber supply.
Christopher Barr, CIFOR senior scientist and coordinator of the study said, "During the 1990s, APP and APRIL borrowed over US$15 billion from international capital markets by telling investors that they have sustainable supplies of very low-cost fiber. However, both companies continue to rely on the clearing of natural forests in Sumatra for 60-70 percent of their wood supply, and each is still years away from meeting its own plantation development targets."
Ongoing efforts by Singapore-based United Fiber System (UFS) to purchase and expand the PT Kiani Kertas pulp mill could place similar pressures on remaining natural forests in Indonesian Borneo, Barr says.
Merrill Lynch, ANZ Bank, and Cornell Capital are now working with UFS to secure financing for the deal, which will have a total value of US$400-600 million.
Over the last decade, leading financial institutions and international investment banks have poured over US$40 billion into pulp mill projects, aimed at increasing capacity in the developing world. To meet growing global demand for paper, analysts expect companies to invest another US$54 billion by 2015, much of it in Brazil, China, Indonesia, Uruguay, and the Baltic States.
Low wood costs are a major factor driving expansion of the sector in these countries, as wood fiber can account for up to 60 percent of pulp producers' cash costs in North America and Europe.
The CIFOR report finds that the scale of pulp mills has grown over the past decade and that individual mills now have a "voracious appetite for wood."
"A single large mill with an annual capacity of 1.0 million tonnes requires the equivalent of 15 percent of the Brazilian Amazon's annual timber harvest," the study states. When this wood is not available from plantation forests, the demand for pulp can drive illegal logging and clearing of natural forest ecosystems. Plantation development itself often displaces forest communities and fuels social conflicts.
Pulp mills can also generate water and air pollution if not operated with proper effluent and emission controls. CIFOR's report, which builds on eight years of study, shows that banks and other financial institutions often conduct only minimal due diligence to assess the sources of wood for pulp projects, in spite of the fact that mills can involve investments of US$1.0 billion or more.
Most banks have little in-house forestry expertise and rely heavily on data provided by the pulp producers themselves and on projections of global paper demand. The study concludes that pulp mill projects often carry significantly higher degrees of financial risk than investors realize.
The CIFOR study finds that the International Finance Corporation (IFC) - the World Bank Group's private sector lending agency - is playing an increasingly important role in financing pulp and plantation projects in emerging economies. Over the least few years, the IFC has aggressively expanded its lending for forestry-related investments, including pulp and paper mills. It now has a forestry portfolio of over US$1 billion, and has helped to attract billions of dollars of additional loans from private banks.
IFC policies require Environmental Assessments for socially and environmentally sensitive projects. CIFOR reports that these assessments are often "overly general, and sometimes they even discourage private banks from assessing a project's impacts when they believe the IFC will be doing so."
Conflict has erupted between Uruguay and Argentina over two massive pulp mills under construction in Uruguay on the Uruguay River near the border between hte two countries, creating regional tensions and disrupting trade. The CIFOR studay faults the IFC for approving funding for the mills "without adequate environmental and social assessments."
"These projects have triggered blockades and months of protests sparked by concerns about environmental pollution and impacts on local economies. As a result, investors stand to lose hundreds of millions of dollars," CIFOR warns. The CIFOR report points out that the environmental assessment submitted to the IFC by Finland's Metsä-Botnia Group "falls far short of what a proper assessment of the mill should consider."
"Lenders to these mills clearly did not anticipate the major problems they are encountering," said Kaimowitz. "The projects were well advanced with World Bank and IFC participation before those institutions ever required an Environmental Assessment. And the private banks apparently relied on the multilaterals to do the job of assessing the financial risks and environmental impact of these projects."
Logged trees are left on Hainan Danzhou City Road, waiting for transport to Jinhai Pulp Paper Plant, an APP subsidiary. Hainan Island, China. (Photo courtesy Greenpeace) Investor enthusiasm for pulp expansion is increasingly driven by China's seemingly insatiable demand for paper products, which is projected to reach 68.5 million tonnes in 2010.
According to the CIFOR report, "this enthusiasm has led investors to ignore egregious misstatements by companies seeking to raise funds to feed this demand."
The report cites Sino-Forest, a company listed on the Toronto Stock Exchange with plantation holdings in China, reported that it had access to 232,600 hectares of timber plantations when, in fact, it had secured only 34,000 hectares, the CIFOR report states.
The IFC failed to catch the misstatements when it made loans to the company in 2000 and 2002. But even after the problem became public, investors continued to flock to Sino-Forest and its subsequent equity issue was fully subscribed.
On the positive side, CIFOR's report highlights the fact that a growing number of banks are now adopting policies that require better social and environmental assessments of their forest-related investments.
For example, Dutch banks ABN AMRO and Rabobank agreed not to finance the clearing of primary forest or the purchase of illegally harvested timber.
In addition, since 2003 some 41 of the world's largest lending institutions have endorsed the IFC-sponsored Equator Principles, which commit them to meeting enhanced environmental and social standards in their loans for specific types of projects.
The report applauds these advances, but notes that the Equator Principles fail to cover most of the loans and bonds used to finance the expansion of pulp mills.
"The Equator Principles are an important first step towards raising accountability among global financial institutions for assessing the impacts of the projects they fund," Barr says. "However, to have a meaningful effect on pulp mill financing, the Equator Principles must be broadened to cover syndicated loans, and issues of notes, bonds and equity, as well as project finance."
CIFOR maintains that regardless of whether they have endorsed the Equator Principles, financial institutions have a responsibility to improve their capacity to assess the financial, environmental and social risks of investing in the emerging pulp market.
At a minimum, banks and investors must insist that pulp producers provide better data on the sources of their raw material and should conduct independent assessments of fiber supplies and environmental and social impacts.
For their part, CIFOR recommends that pulp and paper companies foster better understanding by being more transparent in disclosing information on operations, and by establishing a common, industry-wide reporting standard. The Global Reporting Initiative sponsored by the UN Environment Programme offers an institutional framework within which such a reporting standard could be developed.
CIFOR is a Future Harvest Center. Future Harvest supports 15 food and environmental research centers that are primarily funded through the Consultative Group on International Agricultural Research.
Global Banking Giant ABN Amro Awardedfor "Outstanding Environmental Hypocrisy"
Conservation Coalition Exposes Dutch Bank for Violating Commitmentto the Environment by Bidding on Biggest Oil Drilling Project in History.
Rainforest Action Network, SAN FRANCISCO
11th May 2006
A full page advertisement in today's Washington Post exposes Dutch banking giant ABN Amro's environmental hypocrisy for bidding to fund one of the most environmentally and socially destructive projects in history. The ad comes the day before ABN Amro is scheduled to accept the World Environment Center's 2006 Gold Medal Award for "International Corporate Achievement in Sustainable Development."
Purchased by Rainforest Action Network, Pacific Environment and Sakhalin Environment Watch, the ad calls on ABN Amro to live up to its reputation as a global leader in sustainability and withdraw its bid to finance the highly controversial Sakhalin II oil and gas project, the biggest oil and gas exploration project in history. The bank was a leader in the development and institution of the Equator Principles, the first ever framework for incorporating social and environmental practices in private bank lending. Due to the impacts to several endangered species, including the world's 100 remaining Western Grey Whales, as well as the negative impacts on the local fishing community, Sakhalin II violates these principles.
"Sakhalin II's radical resource extraction is exactly the type of project that the Equator Principles were designed to prevent," said Ilyse Hogue, director of Rainforest Action Network's Global Finance Campaign. "While other banks are making tough decisions and centralizing sustainability in their business operations, ABN Amro is forsaking its commitment to these principles by bidding to fund this project. To accept an environmental award while doing so is environmental hypocrisy at its worst. ABN Amro and all other Equator Banks have no credible choice but to withdraw their support for Sakhalin II."
The ad affirms that ABN Amro promotes itself as an environmental leader for having led the 2003 implementation of the Equator Principles. Led by Royal Dutch Shell, Sakhalin II is a $20 billion operation to extract oil and gas from beneath the coast of Far East Russia's Sakhalin Island. Several Equator Principles signatory banks have declined to fund Sakhalin II due to serious environmental and social concerns, including the danger to the Western Pacific Gray Whale, a population on the verge of extinction.
"ABN Amro giving money to Sakhalin II is the same as giving money for extinction of whales and the destruction of salmon runs," said David Gordon, Pacific Environment's Executive Director. "ABN Amro should be a real environmental leader and reject financing for oil drilling in Sakhalin."
Other concerns include a planned pipeline that would span 21 active seismic faults and hundreds of wild salmon spawning habitats, as well the dumping of two million tons of dredging spoil into Aniva Bay - threatening a key fishery and the livelihoods of many Sakhalin islanders.
Banktrack, an international campaign network focusing on private investments has released a report entitled "Sakhalin II Gas and Oil Project: Further Breaches of the Equator Principles" that details the violations of the project.
ABN Amro will be honored at The World Environment Center's (WEC) greenwashing gala in Washington, D.C. this Friday. The WEC is an industry-driven organization, heavily led and supported by Shell, that purports to promote sustainable development by multinational corporations. Past Gold Medal "environmental leaders" include Dow Chemical, British Petroleum, DuPont, Exxon, and Royal Dutch Shell. Activists plan to be at Friday's event to present ABN Amro with an award for Outstanding Environmental Hypocrisy, an honor they truly deserve.
"The future of our land and our way of life is at risk," said Dmitry Lisitsyn of Sakhalin Environment Watch. "There is a clear opportunity here to invest in the long term health of our community and our environment rather than the short term profits generated from this destructive oil project. We call on ABN Amro and all financial institutions, especially those that have signed the Equator Principles, to reject this project."