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June 24, 2004
Indonesian Forestry and International Finance Move Toward Sustainability
    by William Baue

A profile of Asia Pulp and Paper and ABN AMRO focusing on their efforts to reverse environmental, social, and financial devastation through sustainable practices (part two of a three-part article).


Of the estimated 100 million cubic meters of wood consumed by the Indonesian pulp industry between 1988 and 1999, 92 percent came from clear-cut rainforests, according to the Center for International Forestry Research (CIFOR) report, Profits on Paper. To give a sense of proportion, this amount of clear-cut wood could fill 95 Empire State Buildings. The unsustainable nature of this approach in the 1990s, mixed with a variety of other factors outlined in part one of this three-part article, created the makings of a financial, social, and ecological time bomb.

For Asia Pulp & Paper (APP), Indonesia's biggest pulp and paper producer, this bomb exploded in early 2001. On March 12, the company announced a standstill on all debt repayment; and on April 4 the New York Stock Exchange suspended trading of APP shares, which had fallen 98.4 percent in one year. While AAP is clearly responsible for the unsustainable practices that led to its collapse, the CIFOR report and its successor, Friends of the Earth (FoE) UK's Paper Tiger, Hidden Dragons, place significant blame on international financial institutions too. Part two of this article examines what APP and its financiers have done recently to reverse unsustainable forestry.

Netherlands-based ABN AMRO (ticker: ABN), one among the 300 international financial institutions that financed APP in the 1990s according to the FoE report, took the most proactive stance by establishing a forestry policy almost immediately.

"This policy was developed in the third quarter of 2001 and was a result of an extensive consultation process, which included various clients, industry experts, and NGOs [nongovernmental organizations]," said Paul Mudde, ABN AMRO's senior vice president for sustainable development.

Oekom Research, a Munich-based sustainable and responsible investment (SRI) research and rating firm, praises this policy in its November 2003 banking sector report focusing on sustainable forestry, commissioned by the WWF Germany. The report, which Oekom claims to be the world's first rating devoted explicitly and exclusively to this field, assesses eleven European (primarily German) banks on 30 criteria. ABN AMRO topped the overall ranking.

"ABN AMRO carried the day with its forestry policy, which sets the standard for the industry and is also recognized by NGOs," states Matthias Bönning, Oekom's head of research, in the report.

However, ABN AMRO's lowest grade came in the communication and transparency category of the rating. Communication around issues such as sustainable forestry requires a delicate dance between "transparency on one hand and our obligation to respect client confidentiality on the other hand," according to Mr. Mudde of ABN AMRO.

Mr. Mudde exhibited this dance in his comments to SocialFunds.com.

"Given the fact that it is publicly known, we can confirm that there is a relationship between ABN AMRO and APP [that] was established prior to the development of our forestry policy," Mr. Mudde told SocialFunds.com. "[T]he implementation of our forestry policy started immediately after the policy was approved by our internal credit committee in October 2001."

"This implied that as per October 2001 new transactions and all new and existing client relationships were to be assessed against the policy criteria," he added. "This also applied to the business relationship with APP."

Interestingly, APP itself is quite forthcoming with information on its sustainability initiatives. In February 2004, APP published its Sustainability Action Plan ( SAP), developed in conjunction with government organizations as well as NGOs. The plan calls for achieving full sustainability in 2007, including total reliance on plantation-grown wood by then, conserving 77,000 hectares of forest, and establishing community development and relations programs.

"These advances on the ground--conserving habitats and helping to develop communities--have started to change previously-held misperceptions, and will demonstrate that our company sources its wood from sustainable forestry management units," said Arian Ardie, APP's director of sustainability and stakeholder engagement.

The Indonesian Ecolabelling Institute (LEI) has already conducted one audit of APP's newly instituted wood tracking system.

"The audit indicated that there were government-issued licenses for all the wood entering APP's two pulpmills, but that our system should be improved to be able to provide a watertight guarantee of the legality of each piece of wood entering the mill," Mr. Ardie told SocialFunds.com.

Finally, on the first of this month, APP announced an agreement with its major creditors on a set of environmental covenants that will become part of its Master Restructuring Agreements (MRAs).

"In the past 12 months, [APP has] reported significant progress, including the setting aside of additional areas for conservation, ensuring a legal wood supply, using wastelands for plantation development, and securing additional plantation grown fiber for their wood supply," said Detlev Malzkuhn, director of German export credit agency (ECA). The ECAs of Japan, France, Austria, Sweden, Finland, Italy, Spain, and Denmark joined the agreement. "However, after discussions with the environmental community, we recognized that there is a need for one further round of conservation assessment so an independent third party is being appointed to make an assessment of conservation values within [APP's] forests and to recommend appropriate conservation management systems."


Part one of this article discusses how unsustainable forestry practices in Indonesia impact sustainable forestry practices in the US; part three asks how sustainable Asia Pulp & Paper's Sustainability Action Plan is.

 

 
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