Recommendations for private finance

Posted: 27 May 2007 in


The role of commercial banks

Commercial banks have a responsibility to look at the negative impacts their investments are causing. After being criticised by the public for supporting controversial projects, many banks have adopted the Equator Principles. But due to the Equator Principles’ limited scope, this step is not sufficient to exclude problematic investments. The Equator Principles are only applied to project finance and do not cover bonds, equity, commodities financing or general corporate loans. As only a small part of pulp financing comes from project finance, the Equator Principles are generally not utilized in this sector. Also, the Principles are based on very general criteria and do not sufficiently address the specific problems associated with forest, pulp and plantation projects.

Realising the economic, ecological and social disaster that the investments in the Indonesian pulp sector have caused, several banks, such as ABN Amro, HSBC, Citibank, ING Bank, JP Morgan Chase and Bank of America, have developed specific forest policies. While each of these policies also has weaknesses, most of them contain exclusion criteria that may at least weed out the worst projects. The forest policies, for example, do not allow financing that leads to the destruction of primary (rain) forests or violates national laws or international conventions. Some banks will not finance operations in areas where indigenous land claims are not settled and others recognise the principle of free prior informed consent for affected indigenous communities. While the scope of most forest policies is broader than the Equator Principles, they still do not cover the full breadth of the banks’ financial operations. To date, only ABN Amro plans to apply its forest policy to all forms of financing. All of the above named banks are, however, still a step ahead of their competitors, most of whom have no policy to regulate their financing activities in the forest and pulp sectors.

Banks and other commercial financiers are called upon to develop environmental and social criteria as well as due diligence procedures that cover all of their financial activities. To address the negative impacts of pulp and plantation investments adequately, we recommend that banks develop forest policies with a specific sector standard for pulp that excludes projects with problems in the following areas:

Land tenure and human rights

Governments often ignore the fact that lands designated for plantation development are encumbered with existing access, use and ownership rights. Some governments use force to remove communities from lands to make them available for industrial pulp wood plantations. The process of taking over indigenous peoples and local communities’ lands is often illegal under national law, but takes place due to the political and economic strength of the companies concerned, and the marginalised status of rural communities. Investors need to obtain independent information on the status of lands that companies claim are available for pulp mill and plantation development, and pay particular attention to overlapping land access, use and ownership claims, and land conflicts.

Investors should require that relevant international conventions for the protection of human rights are respected [1].

Free, prior and informed consent [2]

Indigenous Peoples have rights that derive from their status as peoples with land management and governance systems that predate the nation states that they now find themselves within. One of these rights is the right to give or withhold their free, prior and informed consent over development plans that will take place on or impact their customary territories. Investors should request information on indigenous peoples that will be affected by the project, including information on any agreements reached with indigenous peoples about the planned projects. Investors should seek independent information to verify that indigenous peoples have given their free, prior and informed consent to planned plantation and pulp and paper mill developments that will impact their customary territories.

Biodiversity and conservation values

Pulp mills have large impacts on forests and other ecosystems through the use of wood from natural forests and the conversion of forests and other ecosystems to pulpwood plantations. While national law may require the protection of biodiversity, environmental impact assessments in many countries are not rigorous enough to determine and prevent negative impacts on biodiversity. In many cases, industrial logging and forest conversion take place in areas with potentially high conservation value without any assessment of environmental and social impacts. Investors should therefore require independent assessments on the impacts on biodiversity and conservation values of proposed developments, including all areas where pulp wood may be sourced, both within and outside proposed concession areas. Conservation values include not only biodiversity values, but also social and cultural values.


Pulp mills generate large amounts of liquid, solid and airborne waste. Due to the limited ability of many Southern governments to monitor and control waste emissions from industrial facilities, it is not unusual that once a pulp and paper mill begins operating, maintenance of its waste water treatment facilities are ignored, and hazardous mill waste ends up being released into the air or dumped in waterways and on nearby lands. In order to minimise hazardous waste production, investors should require the use of best available technology to limit toxic emissions to air, water and solid waste. Investors should, for instance, require that no chlorine and chlorine compounds be used for bleaching. In addition, investors should require an ongoing system for the independent monitoring of pulp and paper mill waste, with the involvement of communities that will be affected by plantations and mills. Pesticides, herbicides and fertilizers used on pulpwood plantations often pollute water and soils and impact the livelihoods of surrounding and downstream communities. Independent monitoring of plantations impacts, including local stakeholder involvement, needs to be included in loan agreements.

Water impacts of plantations and mills

Fast growing pulp wood plantations use vast amounts of water and often have a negative impact on agricultural lands surrounding and downstream of plantation areas. Pulp and paper mills use large amounts of water. Investors should require independent information on the water related impacts of plantations and pulp and paper mills.

Raw material supply

Companies seeking investment in pulp and paper mills often overstate the raw material supply that they have access to or plan to grow. Figures for existing plantation wood volumes are often based on best sites. Many areas of plantations are subject to overlapping land claims and land conflict, which can lead to the wood resource being burned or otherwise removed. In some countries such as Indonesia, pulp mills rely on wood from natural forests, often with devastating impacts on these forests and exacerbating problems of illegal logging and forest conversion. The raw material should not come from plantations that have replaced natural forests. Investors must require independent information on the raw material supply, land conflicts affecting that supply, assumptions about annual growth rates, and impacts on natural forests. They should demand that the pulp and paper company provides credible, independent, third-party certificates for legal and sustainable wood sourcing for all raw material used.

Labour standards

Mill and plantation workers in the South are often exposed to hazardous chemicals, and suffer from poor working conditions and low remuneration. Investors should require independent information on the working conditions in proposed or existing mills and plantations. Investors must insist that minimum ILO standards relating to workers and subcontracted workers rights are followed [3]

Genetically modified organisms

Some pulp companies are developing genetically modified trees in order to maximise growth rates, to produce wood that can be pulped more easily or to produce trees which are pest-resistant. This poses unacceptable risks to the environment. Investors should require that no genetically modified organisms be used in plantations and that the companies in which they invest are not carrying out any research into genetically modified trees.

Know your client

Companies seeking investment try hard to present their projects as economically, ecologically and socially viable. It is important to examine the track record of any company seeking investment, and to take into account the irregularities, social problems or forest destruction it has caused in the past.

The case of the Soeharto family in Indonesia shows how major irregularities develop when politically exposed persons or politically exposed companies who have illegally amassed large fortunes, diverted international aid payments or taken bribes in return for arranging favourable decisions, are involved in a project. Investors should be extremely cautious when contemplating investments in countries where there is a high risk of bribery and corruption.

Know your country

Banks are advised to develop country risk categories that mirror the environmental and social risks of doing business in countries with weak environmental laws, weak implementation, a lack of democracy, a high instance of corruption and other issues, which will impact the environmental and social performance of specific investments. In countries with high risk ratings, due diligence procedures for environmentally sensitive projects must be especially thorough and in some cases, it may even be advisable to call a moratorium for environmentally sensitive investments, such as major pulp projects, in such countries.


[1] ILO Convention 169 for the Protection of the Rights of Indigenous Peoples, Draft UN declaration on indigenous peoples, General Declaration of Human Rights (1948), UN Convention for the Elimination of all Forms of Racial Discrimination (1966), International Agreement on Economics, Social and Cultural Rights (1966), International Agreement on Civil and Political Rights (1966).

[2] The right for an free, prior and informed consent for indigenous people is e.g. found in the Draft UN declaration on indigenous peoples

[3] ILO Fundamental Work Rights: freedom of association, the right to organise and to collective bargaining; the abolition of forced labour, the elimination of child labour; and the prohibition of discrimination in employment and occupation (equality of opportunity and treatment).


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s