In the Red Methodology

Objectives

In 2017, EPN published the first assessment of bank policies for the pulp and paper sector, known as In the Red report. The objective of the research was to assess whether the total framework of publicly available investment policies and sustainability commitments in place at a given financial institution ensured that it did not support companies or projects in the pulp and paper sector in breach of the Red Lines. 

The second In the Red policy assessment, published in 2020, has two objectives:

  •  Assess if there have been changes (improvements) in the policies of the banks that were assessed in the previous report.
  •  Expand the selection of assessed financial institutions.

Selection of financial institutions

The selection of the financial institutions that were assessed in the 2020 research was made based on the following criteria:

  • All banks included in the first report were assessed again to evaluate possible changes in their policies
  • All financiers and investors that have invested more than USD 1 billion in companies active in the pulp and paper sector in the past 5 years, based on the forestsandfinance.org database
  • Financiers that are currently involved in the financing of the expansion of pulp production capacity.  

Assessment of the policies

To assess the policies of the financial institutions, we have assessed:

  • All publicly available investment policies and guidelines (or summaries thereof) that are of relevance to financing the pulp and paper sector; and
  • Seven voluntary sustainability standards that are of relevance to financing the pulp and paper sector:
    • Equator Principles
    • IFC Performance Standards
    • World Bank Environmental, Health and Safety Safeguard policies
    • FSC
    • The Chinese Green Credit Guidelines
    • The OECD guidelines for Multinational Enterprises
    • The OECD guidelines for Export Credit Agencies

For each Red Line, we evaluated whether a financial institution’s policies left them well protected, partly protected but still at risk of the Red Line being violated, or not protected. The same was done for the voluntary standards. Wherever a financial institution references one of the assessed voluntary standards, these were taken into consideration for the final scoring. 

This evaluation resulted in a qualitative assessment based on close reading of the set of relevant polices. The assessment of the policies took place between April and December 2019 – by a team of evaluators in four countries. We gave each financial institution the opportunity to comment on its results before publication, to make sure we covered all the relevant documents and fully understood its policy framework.

The Red Lines – Pulp and paper benchmarking criteria

The assessment criteria are based on the Green Paper, Red Lines. For each Red Line, we have explained in which circumstances we consider the bank to be well protected or partly protected, and provided some additional explanatory notes, particularly in response to questions received from banks when reviewing their draft results. For more details, see Table 1.

When evaluating bank policies against these criteria, we have been mindful to interpret the language used consistently. For example, where a bank’s policy states that it “expects” certain practices from a client, we assumed this implies a requirement, and that the bank has processes in place to make sure the expectation is met. However, when a bank policy states that it “encourages” certain practices, we assumed that there is no absolute requirement in place, and that the bank may continue to finance clients which do not respond positively to this encouragement.

Table 1 – Criteria for the scoring of each Red Line

Red LineElements of policyDescriptionWell ProtectedPartly Protected
Regulatory requirements
Ensure LegalityAll prospective clients must be in full compliance with all local, national and international norms, regulations, laws and conventions related to acquisition, harvesting, sourcing or use of land, concessions, forest products or production materials as well as for the implementation of pulp and paper mills and other related infrastructure.Relevant international laws and conventions include:
* ILO Fundamental Work Rights
* ILO Convention 169 for the Protection of the Rights of Indigenous Peoples
* General Declaration of HR
* UN Convention for the Elimination of all Forms of Racial Discrimination
* International Agreement on Economics
* Social and Cultural Rights
* International Agreement on Civil and Political Rights
* UN Declaration of the Rights of Indigenous Peoples
* UN Guiding Principles on Business and Human Rights
Financial institution policies require client compliance with national and international laws and regulations.Financial institution policies require compliance with national law and/or reference their commitment to international norms, regulations, laws and conventions, but do not explicitly require clients to comply with these. Key internatioanl norms are the ILO core conventions and the UN Declaration of human rights.
No Corruption and Tax EvasionClients must not be involved in corruption nor establish ownership structures that are clearly meant to avoid the payment of taxes in the country where the production activities are taking place.Note: Bank policies on corruption will only protect against a breach of the Red Line where they ensure bank clients are not involved in corruption. Policies which only address the possibility of the bankÕs own involvement in corruption are not sufficient to protect the Red Line. Relying on Òensuring legalityÓ is not sufficient to ensure banks do not finance customers involved in corruption and tax avoidance, e.g. because not all countries have sufficient anti-corruption regulations in place, and because tax avoidance is by definition legal. Corruption and tax avoidance both contribute to social inequality in themselves, and increase the chances of a company contributing to deforestation and other social harm.
* Lopez-Claros, A., 2014. Nine reasons why corruption is a destroyer of human prosperity. World Bank, Future Development, [blog] 31 March. Available here. [Accessed 10 April 2017].
* Koyunen, C. & Yilmaz, R., 2009. The impact of corruption on deforestation: a cross-country evidence. The Journal of Developing Ideas, [online]. Available at here. [Accessed 10 April 2017].
Bank policies require clients to prove compliance with both of the above.Policies mention due diligence requirements on financial crimes, but do not state any expectations from clients regarding tax avoidance.
Ensure ESIA for mills and plantationsProspective clients must provide evidence that they have completed and publicly disclosed, online, a full and comprehensive Environmental and Social Impact Assessment (ESIA). This should covere all direct and indirect impacts of their activities, including, when applicable, the management of and sourcing from forests and plantations, their manufacturing facilities, their operations, as well as associated infrastructure like railways, roads and ports. Clients must demonstrate that all relevant stakeholders were properly consulted, and that FPIC was obtained when required, when conducting the assessment and that their concerns and rightful interests have been fully taken into account.Note: The need for bank clients to have ESIAs in place for mills and plantations should be part of a bankÕs policy framework for all types of finance, not just for financial transactions where the use of proceeds is known. The ESIA should comply at a minimum with the requirements set out in the OECD "Common Approaches" -Annex II.All aspects of the above are required for mills and plantations.ESIAs are required for mills but not necessarily for the forests or plantations the mill sources from OR public disclosure is not required OR full stakeholder consultation may not be explicitly required.
Social requirements
Ensure FPICClients must demonstrate that proposed operations have obtained the free, prior and informed consent (FPIC) of all affected Indigenous peoples and communities with customary rights. This is also required for projects that impact indigenous or customary rights, even if they are not directly located on indigenous or traditional lands. This must include documentation of the FPIC procedures for identification, consultation and documentation of all affected communities, as well as the establishment of a dispute mechanisms for, and provision of remedy for, adverse impacts.The FPIC procedure must at a minimum follow the requirements of the ILO 169 convention, and then be extended to other communities with customary rights.All aspects of the above are required for mills and plantations.FPIC requirement is limited to Indigenous peoples OR aspects including documentation / establishment of a grievance mechanism is not explicitly required.
Respect Human RightsClients must demonstrate that their operations respect human rights, as defined by the United Nations and other international bodies, throughout their own operations as well as within the companies from which they source or which they contract. Clients must respect all core conventions of the International Labour Organisation, including those on child labour, forced labour and debt bondage.The financial institutions commits to respect human rights and conduct human rights due diligence extending to the impacts of its finance, and refuses to finance child labour and forced labour. In addition, it has an explicit requirement for clients to demonstrate that they respect human rights, for example, via ensuring they have appropriate human rights policies and processes in place, that also apply to their suppliers, or via prohibiting of finance for companies which fail to respect human rights.The financial institutions commits to respect human rights and conducts human rights due diligence extending to the impacts of its finance.
Respect Indigenous rights and customary land use rightsClients must demonstrate that their operations fully respect Indigenous rights, as defined in the UNDRIP, as well as traditional rights, including land tenure and use rights of local communities.All aspects of the above are required for mills and plantations.Bank policies require that clients respect Indigenous rights but do not require them to respect other communitiesÕ land use rights.
No forced resettlementClients must not cause resettlement of people who are dependent for their livelihoods on land affected by the clientÕs project, whether full or partial, permanent or temporary, physical or economical, without their Free, Prior and Informed Consent.Economic resettlement or displacement includes loss of assets or access to assets that leads to loss of income sources or means of livelihood, following the definition in IFC PS5.Any form of resettlement without FPIC is prohibited for mills and plantations.Resettlement without FPIC is prohibited for indigenous people but nor for other communities OR enhanced due diligence is required for resettlement OR physical resettlement is prohibited, but economic resettlement only requires compensation.
Environmental Requirements
No forest degradation and deforestationClients must prove that their operations, or those of the companies from which they
source materials for their manufacturing process, do not involve activities that lead to:
1. loss of high conservation value (HCV) forests, ecosystems and habitats;
3. loss or degradation of high carbon stock (HCS) forets;
2. conversion of natural forests or other high conservation value ecosystems into plantations for paper fibre;
4. loss or degradation of regionally, nationally or internationally protected areas (UNESCO Natural World Heritage Sites, UNESCO Man and the Biosphere Reserves,
IUCN Protected Areas, Key Biodiversity Areas, and wetlands designated under the Ramsar Convention on Wetlands of International Importance);
Note: Where banks require either FSC or PEFC certification from clients, we do not consider that this provides protection against breach of the Red Lines, as we do not recognise PEFC certification as effective in this regard. Please see section 4.2 Forest certification schemes and the Red Lines, below, for further explanation. See hcvnetwork.org for more information on High Conservation Value areas and http://highcarbonstock.org/ for more information on High Carbon Stock Areas.All the elements above are substantially prohibited in bank policies.Not all the elements above are explicitly prohibited in bank policies OR prohibition of forest degradation and deforestation only applies in especific cases
(e.g. activities causing deforestation in tropical moist forests) OR the policies do not cover third party operations (e.g. suppliers of timber to pulp mills).
Protect endangered speciesClients must not harvest or trade in species that are protected under host country laws or regulations or listed on the IUCN Red List for endangered species, or allow this to take place as a result of their operations.Note: Forestry companies can impact endangered species, principally through harvesting or damaging endangered tree species and by damaging habitats of endangered animal species. Bank policies which exclude harvest or trade of species covered by CITES, the Convention on International Trade in Endangered Species of Wild Fauna and Flora, do not contribute towards protecting this Red Line, as CITES is an international treaty and therefore covered under Òensuring legalityÓ. The IUCN Red List is more extensive that CITES.All aspects of the above are required for mills and plantations.Policies are in place aimed at protecting endangered species, but these fall short of a full protection for all species listed on the IUCN Red List OR the policies do not cover third party operations (e.g. suppliers of timber to pulp mills).
No high-risk speciesClients must not introduce genetically modified species into the environment, or introduce or use invasive alien species, or allow this to take place as a result of their operations.All aspects of the above are required.Policies prohibit or limit the introduction of genetically modified species OR introducing or using invasive alien species (but not both) OR the policies do not cover third party operations (e.g. suppliers of timber to pulp mills).
No fireClients must not use fire for the conversion of land, or allow this to take place as a result of their operations. Exceptions can be made only for cases where there is a scientific consensus that fire is part of the natural dynamics of the ecosystem and where the use of fire is essential to maintain the ecosystem.Note: Where banks require that their clients have policies against uncontrolled and/or illegal use of fire, we do not consider this Red Line as well protected as this does not rule out financing for companies using controlled fire. As fire is a method of land clearance that causes rapid releases of large amounts of greenhouse gases and is damaging soil and biodiversity with often substantial human risks to human health and local economies as a result, the acceptance of controlled fire does not decrease these risks. Moreover, the term Ôcontrolled fireÕ can be misleading since many Ôcontrolled fireÕ operations lead to uncontrolled fire. The only exception is where fire is a natural part of the ecosystem functioning and the local biology is therefore adapted to survive fires.
* Nasi, R., Dennis, R., Meijaard, E., Applegate, G. & Moore, P., n.d. Forest fire and biological diversity. [online] FAO Corporate Document Repository. Available here. [Accessed at 11 April 2017].
Policies explicitly prohibit use of fire as outlined above.Policies prohibit uncontrolled and illegal use of fire for conversion of land, OR the policies do not cover third party operations (e.g. suppliers of timber to pulp mills).
Protect peatClients must not establish plantations on peatland, regardless of depth, nor degrade peatland, or allow this to take place as a result of their operations. Clients that have or source from existing plantations that were established on peat shall have a system in place to manage the peat soils in the most ecological way.Note: Policies protecting peatland are crucial as clearing and draining peatland for agriculture or forestry emits carbon dioxide, increases the risks of large scale fires, and contributes to climate change, while peatland Ð if kept intact Ð protects against flooding, provides water security for millions of people, and is a biodiverse habitat.
* Wetlands International, 2014. Factsheet: Subsidence of peat soils Ð flooding risks in South-East Asia. [pdf]. Available here. [Accessed at 10 April 2017].
* Wetlands International, n.d. Peatland Treasures. [online] Available here. [Accessed at 10 April 2017].
* Too Much Hot Air, EPN Discussion Document, May 2017 [online]. Available here.
Policies explicitly prohibit all aspects of the above.Policies prohibit new plantations on peatlands but do not cover management systems for existing plantations OR the policies do not cover third party operations (e.g. suppliers of timber to pulp mills).
No persistent pollutionTechnology used in mills must include at least secondary effluent treatment and must not emit persistent pollution to air or water, or cause lethal or chronic toxicity to aquatic species. No use of elemental chlorine bleaching. Furthermore, clients should have policies in place prohibiting the use of pesticides that are banned under the:
¥ Stockholm Convention on Persistent Organic Pollutants;
¥ Rotterdam Convention on the Prior Informed Consent Procedure;
¥ Montreal Protocol on Substances that Deplete the Ozone Layer;
and that strictly limit the use of others hazardous pesticides and chemicals.
Policies require all aspects above.Policies are in place to prevent pollution, but only partly prohibit the aspects above OR the policies do not cover third party operations (e.g. suppliers of timber to pulp mills).
Corporate association / scope of the policy
Corporate association / scope of the policyThe financial institution's policies als applies to the client's supply chain, as well as to other companies it is directly associacted with, including a holding company, a sister or a subsidiary company which is active in the forestry sector and which is involved with such activities.Note: Where bank pulp and paper policies do not cover sourcing forestry commodities from third parties, they can quickly turn out to be useless, as large pulp and paper companies tend to source from third party suppliers, and if these suppliers are not taken into account, this damages the extent to which other Red Lines are protected.Policies make clear that the requirements apply to sourcing from third parties AND parent, sister and subsidiary companies.Policies make clear that the requirements apply to third parties OR parent, sister and subsidiary companies, but not both.

Limitations of the assessment

It is important to note that with our assessment we have not attempted to come up with a comparative ranking of policies of all banks covered in the research. This would go beyond our objective to have an informed basis for further engagement with the banks financing the pulp and paper sector.

Additionally, this study does not cover the extent to which policies are actually implemented, nor the quality of the due diligence that is conducted to implement a policy. For example, we assume that where a bank’s policies create requirements on its clients, the client must demonstrate to the bank that it meets these requirements.

The study has been carried out by a team of people in four countries able to read bank policies in their native languages where necessary. There will inevitably be some variation of nuances and interpretations of terms in different countries but we have made every effort to ensure consistency of the assessments carried out by team members in different countries.

Methodological changes between the 2020 In the Red and the 2017 assessment

For the 2020 assessment an effort was made to increase the coherence in the scoring of different policies. This was done in part by reducing the number of people who contributed to the assessment, as each person will apply a different nuance, and by contracting a third party to partly verify the scores. This has led to some changes in the scoring of policies that have actually not been updated since the last assessment. In most cases this resulted in a downgrading of the policy. However, it may also have influenced the scoring of policies that have changed. This means that some care should be taken when drawing conclusions by directly comparing the results from this and the previous assessment, for a specific financier. For a more informed conclusion it is important to read the actual policy and the comments on why a certain score was given.

In addition to a slight change in the way the criteria are assessed, some small changes were made in the criteria itself:

  • The red line on legality was expanded to include the pulp mill itself and any related infrastructure, while previously it only applied to the plantations of forests the company sources from.
  • The red line on FPIC was expanded to also apply to projects that impact indigenous or customary rights, even if they are not directly located on indigenous or traditional lands. This is for example the case of a mill that discharges waste water upstream from an indigenous territory.
  • The’ no persistent pollution’ red line was adapted to also cover the use of pesticides, while the use of hog fuels was excluded from the criteria.
  • The red line on no deforestation or forest degradation and the red line on corporate association were rephrased to improve clarity.

For more details on the criteria used in this assessment see Table 1, where changes in the text are marked in red. For the criteria used in the previous assessment, please see In the Red.