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March 08, 2005
Comparing Citigroup and JP Morgan Chase Policies: Which Stems Illegal Logging in Indonesia?
    by William Baue

Before providing funding, financial institution policies requiring documentation certifying legitimate timber sourcing may help promote sustainable logging in Southeast Asia.

Timber that is illegally logged from protected areas and national forests in Southeast Asia is flooding global markets, according to mainstream sources such as BusinessWeek and the American Forest & Paper Association (AF&PA). US financial institutions, in choosing whether or not to confirm that the companies they fund purchase only timber documented to originate from legitimate sources, play an important role in either feeding or stemming this trend. Comparing how Citigroup (ticker: C) and JP Morgan Chase (JPM) approach this problem can illuminate which path may lead to healthy woods and which to a clear-cut.

Last week, Citigroup CEO Chuck Prince announced that Rimbunan Hijau, a Malaysian logging firm, needs to comply with Citi's Environmental and Social Policy to continue to qualify for financing. The policy, which was created in collaboration with environmental group Rainforest Action Network (RAN) and adopted in January 2004, calls for credible, independent, third-party certification of Rimbunan Hijau's Papua New Guinea operations.

A May 2004 Papua New Guinea Department of Labour and Employment report documents widespread corruption and human rights abuses by Rimbunan Hijau, and a January 2004 Greenpeace report on the company exposes trafficking of illegally harvested rainforest timber.

"Rimbunan Hijau presents the perfect test against which to judge the resolve of the international community to deal effectively with the problems of forest crime and the trade in illegal timber," the Greenpeace report states. Citi's enforcement of its Environmental and Social Policy requiring Rimbunan Hijau to certify the legitimate origins of its timber may pass this test.

JP Morgan Chase has also recently enhanced its environmental risk management, though perhaps not sufficiently to pass such a test. In May 2004, JP Morgan Chase appointed Amy Davidsen to the newly-created position of director of the office of environmental affairs, a newly-established department. It also created a firm-wide committee on environmental issues, accountable to the public policy committee of the Board of Directors. These moves prompted socially responsible investment (SRI) firm Christian Brothers Investment Services (CBIS) to withdraw its shareowner resolution on environmental issues.

However, late last month RAN and Greenpeace announced findings of their joint investigation linking JPMC to procurement of timber from legally disputed or unknown sources. A November 26, 2004 amended filing with the US Securities and Exchange Commission (SEC) reveals that JPMC serves as documentation agent and leading lender for a $165 million loan to BlueLinx (BXC), the largest building products distributor in the US.

US Customs records for the first half of 2004 show that BlueLinx, a former division of Georgia-Pacific (GP), imported wood from eight Indonesian suppliers that the Indonesian Department of Forestry says mill lumber originating from legally disputed or unknown sources. In a January 21, 2005 conference call with RAN and Greenpeace representatives, BlueLinx General Counsel Barbara Tinsley indicated that the company does not intend to change its Indonesian purchasing policies, which fail to certify legitimate sourcing.

JP Morgan Chase spokesperson Brian Marchiony told that the company "fully intends to have a comprehensive environmental policy in place next month." However, he "declined to comment" on whether JP Morgan Chase is considering revoking financial backing of BlueLinx or if the policy will require independent certification of timber sources.

Such certification is the key to ensuring that timber does not originate from illegal sources, according to a study published in the February 2004 edition of Science magazine.

"Stemming the flow of illegal wood from [the Indonesian island of] Borneo requires international efforts to document a legitimate chain-of-custody from the forest stand to consumers through independent monitoring" writes lead author Lisa Curran, director of the Tropical Resources Institute (TRI) at the Yale School of Forestry.

Mr. Prince of Citigroup indicated the company's inclination to require the gold standard in certification by the Forest Stewardship Council (FSC), an independent global non-profit established in 1993.

"Citigroup CEO Chuck Prince's announcement this [past] week that the bank is persuading Rimbunan Hijau to improve its logging practices in Southeast Asia is a tangible demonstration that these policies can make a real difference and can help protect endangered regions and long-term shareholder value at the same time," said Steve Lippman, senior social research analyst at SRI investment firm Trillium Asset Management. "We expect this kind of proactive engagement to become the norm over time in the banking industry and challenge other financial institutions to follow Citigroup's positive lead."

When JP Morgan Chase unveils its environmental policy next month, it will become more clear whether the company charts a course similar to Citigroup's, or navigates a less sustainable path.


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