Governments are being urged to introduce stricter due diligence requirements for financial institutions involved in timber trading, following a detailed investigation into a deforestation scandal in Southeast Asia.

Global Witness, an influential anti-corruption campaign group with a focus on environmental protection, published a report this month accusing a Malaysia-headquartered company of carrying out illegal logging activity in Papua New Guinea.

The report says logging firm Maxland had been granted permission to clear trees in Manus island – home to one of the world’s most biodiverse rainforests – to make way for a new road connecting remote coastal communities to the island’s small port city Lorengau. Maxland had also vowed to establish rubber plantations on some of the cleared land, boosting local employment.

However, Global Witness says that the road has yet to materialise and there is little or no progress on planting rubber trees – yet, as of October last year, exports of tropical hardwood from the project have already totalled US$1.85mn in value.

With evidence of activity well outside the area approved for clearing, the organisation concludes that Maxland’s rubber plantation commitment is “highly likely [a] front for illegal logging”.

The report also raises concerns about the project’s ties to international financial institutions. Its research found that Maxland is owned by Malaysian conglomerate Joinland Group, which in turn holds financial relationships with three Malaysian banks: Maybank, CIMB and United Overseas Bank.

Global Witness says shareholders in those banks include major international financiers such as JP Morgan Asset Management in Singapore and New York-headquartered BlackRock. Other financial backers include the Vanguard Group, T. Rowe Price Associates, Dimensional Fund Advisors and CalPERS, as well as Norway’s Government Pension Fund Global.

There is no suggestion those institutions were involved in directly funding Joinland or the logging project in Manus. For Lela Stanley, who led the Global Witness investigation, focusing purely on how individual projects are funded “doesn’t get to a lot of the problematic finance that we’re seeing”.

“Companies like the one we’ve profiled in this report are being propped up by a stream of money that can be tied back to international financiers, and those financiers really do know better,” she tells GTR. “They are talking the talk, but we’re disappointed to see nevertheless they’re linked to these projects.”

Sustainable investment has become a crucial area of focus for institutions involved in trade finance. In a public letter to clients issued in January this year, BlackRock chief executive Larry Fink said the issue now goes beyond reputational risk.

“The investment risks presented by climate change are set to accelerate a significant reallocation of capital, which will in turn have a profound impact on the pricing of risk and assets around the world,” he wrote, adding that sustainability would be moved to the centre of BlackRock’s investment strategy.

BlackRock, as well as JP Morgan Asset Management, CalPERS and Dimensional Fund Advisors, did not issue a response to the Global Witness report.

The Norwegian Pension Fund – the world’s largest sovereign wealth fund – has already divested billions of dollars from the oil and coal sectors. A spokesperson tells Global Witness it expects companies it invests in to reduce deforestation from their supply chains and had already urged banks in Southeast Asia to strengthen their due diligence processes.

Vanguard says it would incorporate the findings into its “ongoing analysis” of the companies involved, while T. Rowe Price says environmental and social factors are key considerations in its investment approach.

In Malaysia, Maybank and United Overseas Bank say they are unable to comment on banking relationships with individual clients, though the latter cites a responsible financing policy that prohibits financing companies involved in illegal logging. CIMB has so far issued no response.

As of press time, none of the international or local financial institutions had chosen to add to those statements when contacted by GTR.


Due diligence reforms

For Global Witness’ Stanley, financial institutions concerned about sustainable investment should ensure sufficient attention is given to deforestation as a contributor to climate change.

“I think the awareness is there that fossil fuels are becoming an increasingly dangerous investment, but we’re not quite there yet with deforestation risk investments,” she says.

The report makes several recommendations to the financial sector, including institutions that are potentially exposed to the Manus project.

“Financiers and lenders to the Joinland Group and its subsidiaries should publicly investigate, and report on, whether through this business relationship they have been exposed to profiting from apparently illegal logging and environmental destruction,” it says.

“Investors should publicly state how they address the risk of holding tens of millions of dollars of investment with banks and financiers with widely reported exposure to local regions and sectors with widespread illegality risks linked to deforestation, including Papua New Guinea.”

More structural change could come from governments and regulators, however. “Another problem is these banks are self-policing, so there’s no consequences for them if they don’t meet their own standards,” Stanley says. “That’s why we believe these due diligence requirements need to be regulated.”

The report suggests governments address enact policies or legislative reforms that “require companies, including financial institutions, to undertake mandatory due diligence to identify, mitigate, prevent and report on risks of deforestation, environmental harm and human rights abuses”.

Similar calls are already emerging within the UK. Last year, the government established a Global Resources Initiative task force, bringing together representatives from campaign groups, public sector bodies, banks and other companies to produce a strategy on reducing the environmental impact of UK supply chains.

In its final recommendations, published in March, the task force calls on the government to introduce a mandatory due diligence obligation on financial institutions “in order to avoid their lending and investments funding deforestation”.

“The finance sector has been slow to integrate commodity driven forest loss and land conversion in their decision-making processes,” its report adds. “This sector must also step up if it is to avoid funding deforestation through lending and investments.”