Illegal Logging Update and Stakeholder Consultation
Royal Institute of International Affairs, Chatham House, 10 St. James’ Square, London SW1.
Wednesday27th - Thursday 28th July 2005. Chairs: Duncan Brack, Rosemary Hollis (Chatham House), John Hudson, Hugh Speechly (DFID).
Short introductions were given by Duncan Brack (Chatham House) and John Hudson (UK Department for International Development)
Impacts of reduction of illegal logging in European Russia on the EU and European Russia forest sector and trade – Dr. Andreas Ottitsch, Program Manager Dr. Alexander Moiseyev; Senior Researcher Lauma Kazusa, European Forest Institute
The research methodology, assumptions and results of the study were presented in detail by Dr Ottitsch. The project compared production and consumption data for the North West region and concluded, based on the limited and relatively unreliable data available, that price increases would neutralise the negative financial impacts of reduced trade on forest owners in Russia, although some scenarios pointed to potentially negative impacts on the Finnish pulp and paper industry.
The assessment worked on the assumption that around fifteen percent of total timber extraction in North West Russia is of unknown origin, of which around half is consumed domestically and half thought to be exported. Of exports, analysis suggested that around seventy five percent is covered by relatively robust private sector chain of custody although the presentation reported that a lack of transparency in these schemes undermined their credibility with some stakeholders.
The full powerpoint file including statistics is available at www.illegal-logging.info/papers/ILSU6_efi2.ppt
Discussion
The discussion began with questions about the price implications for the Finnish and Russian forestry sectors. The level of impact was discussed in some detail and it was suggested that increased costs could be passed to consumers rather than borne by industry if it would become uneconomic. The likelihood of international competition holding global prices down was raised and it was hoped that efforts to reduce illegal supplies in all regions simultaneously would help to raise prices for legal producers who would otherwise lose out as a result of restricted supply.
There was also general discussion about the need for robust tracking systems, the complexities of crossing national boundaries with these systems and the importance of appropriate levels of transparency.
All figures assumed in the research were subject to question by NGOs and trade analysts working in the sector.
Forest Investment study – Jade Saunders, Associate Fellow, Sustainable Development Programme, Chatham House
A short presentation detailing the main recommendations of a study discussed in detail at previous meetings. The study presented an overview of global financing for forestry and related high-risk sectors and set out a series of recommendations for action by EU Member States and partner organisations. The aim of the recommendations is to improve the level of due diligence exercised in forestry investment, with a view to reducing legitimate financing for illegal forest practices. Four key areas of financing, both private and public, are identified in the paper. The key forestry sectors identified in the paper are those which are most capital-intensive and as a result have the greatest external capital investment. These are the pulp and paper sector, agribusiness, and the extractive and infrastructural sectors.
The EU Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan identifies improved financial due diligence as a key tool for reducing the supply of illegally logged timber. It highlights the need for clearly defined, legal and sustainable supplies of timber for all large-scale capital investments in the forestry sector, such as pulp and paper mills, and proposes that banking due diligence be improved to take this, as well as the key social and environmental risks associated with investment in the forestry sector, into account. Particular emphasis is given to investments made with public funds, such as export credits.
Priorities highlighted were:
· To further explore and elucidate the business case for legal forestry and the potential material risks of illegal forestry;
· To improve government policy coherence on forest governance, focusing primarily on the investment criteria, transparency and accountability of investment with public funds, particularly on the part of Export Credit Agencies (ECAs), development banks and public pension funds;
· To ensure that investment experience in the timber sector is reflected in efforts to improve regulation and enforcement across the financial sector in developed and developing capital markets;
· To promote the development of international norms and standards for operations and governance in the forestry and forest lands sectors;
· To encourage the spread and transparent, credible implementation of the Equator Principles – thereby mainstreaming responsible lending practices.
The full powerpoint file of this presentation is available at www.illegal-logging.info/papers/ILSU6_saunders.ppt and the full report is available at http://www.illegal-logging.info/papers/due_diligence_in_forestry_investment.doc
Discussion
Discussion followed about the potential for investors to be held legally responsible for the impacts of their investments, and the likelihood of the European Commission taking forward recommendations on investment in the light of the FLEGT Action Plan.
UK market premiums for verified legal and sustainable timber – Rupert Oliver, Independent Consultant.
The study was based on a series of six-monthly reports which aimed to assess price premiums for verified legal and sustainable timber in the UK market. Product coverage included rough sawn lumber, dimension products, mouldings, decking, and panel products. Geographical focus was on ‘high risk’ supply countries: Indonesia, Malaysia, Cameroon, Ghana, Ivory Coast, Republic of Congo, Democratic Republic of Congo, Gabon, Brazil and Russia. The study concluded that some premiums were available for public sector contracts, in contrast to the rest of the construction market.
Demand drivers identified were retail company commitments to certified products and, more recently, public procurement policies and the perception that government contracts now require independently certified supplies. A key conclusion of the study was the need for greater clarity with regard to the forms of evidence that are acceptable under the UK public procurement policy and for improved coordination and technical harmonisation of policies between EU Member States to ensure consistent market messages.
Two key stages in the maturation of certified supply and market price were identified. The first is when suppliers seek a premium price in the early stages of offering certified wood products to offset initial investment; the second is when availability of competing certified products increases, the ability of companies to demand a premium diminishes and the extra costs are increasingly absorbed by the supplier.
The study concluded that the UK market for certified softwoods has already reached the second phase as the result of wide availability of supplies and established networks, whereas the market for certified plywood and hardwoods has not. The latter market lacks supplies as the commodities are often imported from countries that have been slow to certify. Some countries face challenges relating to governance and a lack of infrastructure and others, primarily the Eastern USA, are structured around small-scale forest ownership and have a large domestic market which has very limited demand for certified product. The study also highlighted detailed operational factors linked with increased costs for certified products, recognising that the impact of these was easier for the large-scale trade to mitigate.
Specific premiums were identified for the following products:
· Malaysian meranti sawn lumber offered at three to four percent premium, could increase when Malaysian Timber Council (MTC) certification meets government procurement criteria for ‘sustainable’ timber;
· Verified African hardwoods, mainly from Ghana, Cameroon and Republic of Congo offered with independent chain-of-custody assessments and assurances of legal status, struggling to achieve two percent premiums;
· Forest Stewardship Council (FSC) certified American hardwoods achieving three to nine percent;
· FSC-certified Brazilian products achieving a wide range of premiums depending on product and availability; decking, for example, can be as high as thirty percent but tends to be used for government contracts and where appropriate time has not been set aside for timber sourcing.
The full powerpoint file of this presentation is available at www.illegal-logging.info/papers/ILSU6_oliver.ppt
Discussion
Chain of custody (CoC) and non-certified verification
Participants were concerned that a lack of clarity about government and internationally agreed standards for non-certified chain of custody/product verification schemes was undermining progress and disincentivising investment in the private sector. It was also felt that some buyers do not understand the importance of CoC in ensuring legal and sustainable claims are credible, leading to even lower demand for credible products. It was also noted that the UK’s tropical timber market currently includes only five to ten percent certified ‘legal’ or ‘sustainable’ products, underlining the importance of non-certified timber in the short term at least. Improved clarity on these issues will be established during phase two of the UK’s Central Point of Expertise on Timber (CPET) and through communications efforts with local authorities.
Communication and support
Many participants felt that market messages were not getting through to all parts of the supply chain as effectively as necessary. This was particularly true of the small and disaggregated joinery sector. It was proposed that government should develop procedures for assessment and enforcement of its procurement policy in order to maximise implementation and communicate the message as clearly as possible. It was also suggested that a communications effort in smaller sectors, perhaps via trade associations would be useful. It was noted that the joinery sector association has recently developed a code of conduct relating to legal procurement.
In addition to smaller private sector players, the importance of larger companies and trade associations developing Corporate Social Responsibility policies which incorporate illegal logging risks was highlighted. In addition to the timber market, the general construction industry was highlighted and the importance of government agencies such as the Carbon Trust and Building Research Establishment
Premium pricing for government contracts
The possibility of government contracts increasing premiums for certified hardwood was suggested, with private sector participants suggesting that a twenty percent premium should be an acceptable ‘cost of sustainability’. However it was noted that MTC-verified legal timber was currently failing to achieve a five percent premium on a regular basis.
China trade update - Kerstin Canby, Forest Trends
The presentation built on work detailed in the previous meeting notes. Rapid growth in Chinese exports in the last seven years was illustrated, as was domestic demand with paper thought to be the most significant sector.
Most exports appeared to leave the country via Hong Kong where re-exporting is usual, primarily to the USA and Japan. Exports to the EU, while less significant in total, showed an increase of 700 percent over the period, of which a noteworthy percentage appeared to supply UK demand. In addition to the rapid growth, China has also successfully diversified both its import and export markets, with implications for leverage over its actions.
In conclusion it was felt that although Chinese processing has expanded at an exponential rate, its profits were not necessarily showing the same growth. The country was thought to be vulnerable to change in market preferences and reduced supplies of timber in neighbouring countries as planned plantations were not yet mature.
The full powerpoint file of this presentation can be found at www.illegal-logging.info/papers/ILSU6_canby2.ppt and further information can be found at http://www.forest-trends.org/
Discussion
The likelihood of India replicating China’s processing expansion was raised and it was suggested that similar growth in domestic demand and low-cost processing capacity would be in place in India within around fifteen years.
Question relating to the reliability of Chinese official statistics were raised and it was noted that within the region, they gave a relatively reliable picture, capturing for example a significant rise in log imports that were apparently from Malaysia when Indonesia implemented a log export ban.
It was suggested that the EU FLEGT process may be a mechanism through which efforts could be made to establish prior notification requirements, standards and audits for customs. It was also noted that the 2001 Asia Forest Law Enforcement and Governance process (FLEG) recommended harmonisation of customs codes.
G8 Feedback – Katharine Thoday, UK Department for Environment, Food and Rural Affairs (DEFRA)
The aim of the G8 was to refocus political attention on forest governance issues and initiate a discussion among the development assistance community on the importance of complementary action. It was recognised that G8 members represent a significant element of the global consumption of timber as well as donor funds and these dual roles were felt to be vitally important. It was noted that G8 environment and development ministers met for the first time and illegal logging was on the agenda for their discussions.
Stakeholder consultation was central to developing these discussions and the main recommendations were:
· Excluding illegal products from markets;
· Using government procurement to protect markets for verified legal and certified sustainable timber;
· Using money laundering legislation to capture the proceeds of forest crime;
· Encouraging industry to act voluntarily;
· Ensuring G8 policy coherence;
· Promoting transparency;
· Supporting forest policy reform;
· Improving information and communication;
The concluding ministerial statement included agreement on a range of actions ‘with each country acting where it can contribute most effectively‘. These included support for regional FLEG/T processes, timber-producing countries’ domestic efforts to improve forest governance and national efforts to reduce demand for illegal timber in EU-member-state markets. It was proposed that these actions should be subject to a review by governments in 2006.
The full powerpoint file of this presentation is available at www.illegal-logging.info/papers/ILSU6_thoday.ppt
Discussion
The proposed review process was discussed and it was noted that, although no concrete plans had been developed to date, officials would meet in the sidelines of the Europe and North Asia (ENA) FLEG St Petersburg meeting in November 2005 to establish a plan.
The US’s attitude to public procurement was discussed and it was noted that this was in part due to the federal structure and in part due to concerns relating to the domestic industry. It was reported that some developments at the state level were under way.
EU FLEGT: Action Plan progress – Neil Scotland, DG Development, European Commission