Ethical Performance
inside intelligence for responsible business


pulp mill risks still not being assessed

June 2006

Investors and lenders are storing up trouble by failing to assess adequately the social and environmental risks of pulp mill projects around the world.

Five years after weak due diligence played a part in Asia Pulp & Paper’s $14bn (£7.4bn) default in 2001, hitting institutional investors worldwide, the Indonesia-based Center for International Forestry Research has found that most export credit agencies and financial institutions still lack the in-house expertise to evaluate the social and environmental impact of pulp mills, instead relying on information from project sponsors. As a result, ‘highly unsustainable’ pulp producers can obtain funding, and basic issues, such as ‘the legality of wood to be consumed by a proposed mill’ and the impact on local people, are poorly assessed.

Where due diligence does uncover problems, the most likely outcome is that ‘the cost and pricing of the offering may increase’. Risk monitoring is ‘geared to avoiding liabilities and meeting legal requirements, rather than to actively uncovering risks and operational weaknesses’, the researchers say in the study of 67 pulp projects proposed between 1995 and 2003. They estimate that up to $54bn of new investment in such projects is needed through 2015.

Cifor favours better screening, external environmental impact assessments, and the extension of the Equator Principles to cover lending other than project finance. It says the Global Reporting Initiative may serve as a disclosure framework, but that at present none of the 13 pulp and paper companies in the GRI ‘are reporting in accordance with’ the guidelines.

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