Paper tiger, hidden dragons: the responsibility of international financial institutions for Indonesian forest destruction, social conflict and the financial crisis of Asia Pulp & Paper

This report documents the environmental and social impacts of Asia Pulp & Paper (APP), assesses the role of international financial institutions in fuelling APP’s unsustainable and damaging operations and examines the link between this unsustainable practice and APP's financial crisis.Financial institutions should acknowledge that it is far more than the financial failure of APP that proves that they seriously underestimated the risk in financing the company. Indeed international financial institutions have failed to sufficiently recognise and act upon a number of risks that are inherent in any investment in the Indonesian pulp and paper industry. These risks are identified as follows:unsustainable supply of raw materialsillegal loggingdistorted global paper marketpoor financial regulationhidden debt burdendebt-driven expansionsocial conflictAPP & covert marketingAs a result of their inadequate investigation and understanding of the Indonesian pulp and paper industry, combined with their substantial investment in those companies over a number of years, financial institutions must accept their share of the responsibility for the crisis facing APP. Lessons in risk learned from the APP crisis should be applied by financial institutions to all their pulp and paper investments. Without ensuring that their investments are both socially and environmentally sustainable, their investments will not be economically sustainable.<B>Recommendations for financial institutions:</B>to help minimise risk and ensure the sustainability of APP and the pulp and paper industry both in Indonesia and other parts of the world, financial institutions are urged to undertake the following recommendations:financial institutions should adopt and enforce more effective due diligence practices to fully assess the financial risks involved with the pulp and paper sector and to ensure that they are not providing funds for illegal or unsustainable practicesfinancial institutions should not provide funds for any new pulp and paper processing capacity in Indonesia and Malaysia for the forseeable future. This should include halting investment in Borneo Pulp and Paper in Sarawak (Malaysia) and two other proposed pulp and paper plants in Kalakaban in Sabah (Malaysia) and at Sungai Danau in Kotabaru, South Kalimantan (Indonesia)financial institutions supporting APP and its subsidiaries should take immediate action to ensure that the fibre supply to APP’s pulp mills comes from legal and sustainable sources and does not involve the destruction of any more rainforest. Financial institutions should agree upon a strategy for achieving this with APP and make the group’s raw material supply chain open to independent verification. To achieve this, financial institutions should take steps to ensure that APP’s processing capacity is reduced and / or to ensure that timber from natural forests is replaced with sustainably harvested pulpwood from independently certified sources. Reducing capacity and ensuring supplies are legal may have the benefit of helping raise global paper pricesfinancial institutions should ensure that they do not invest in pulp and paper projects that are likely to generate social conflict. In the case of APP, financial institutions should work with the group to resolve the conflict between its plantation company and the Sakai people in a manner that is equitable for the affected communitiesto ensure the long term survival of the pulp and paper industry, financial institutions should support projects that utilise agricultural waste products and recycled materials as a more sustainable raw material replacement for timber. More sustainable sources of supply often carry lower risk