Our forests are a vital source of life to plants, animals and humans alike. Their trees do not merely provide a habitat for many species, but they also make the air clean and mitigate the effects of climate change by absorbing carbon dioxide. Ensuring that the forests stay alive is therefore vital to any life on earth.
At the same time, wood has become an important source for many industrial products and ensuring its long-term supply is crucial to keep the economy going. Thus forestry activities have to be sustainable in the long run – they have to protect the woods’ vital flora and fauna, while also providing socio-economic benefits to people depending on them.
“Environmental and economic issues are intertwined here: the forest industry is capital intensive and one of the key drivers for investments is the reliable long-term availability of wood,” explains Mikko Venermo, Lead Oversight Adviser in the EBRD’s Environment and Sustainability Deparment. “A continued wood supply, in turn, is at risk whenever there are unsustainable forestry practices or illegal logging. This can result in lower production, higher wood prices or transportation distances.”
Wide range of clients: from forest owners to furniture manufacturers
The EBRD is actively involved in a wide variety of projects, which involve wood or related forestry products, and therefore has an active interest in promoting the sector’s sustainability.
An investment in the Mondi Group, for example, contributed to more sustainable and efficient forestry activities in the company’s leased forest areas and to increase reforestation of their lands. With several loans to wood panel producer Kronospan, the EBRD supported a foreign investor that is active in several central and eastern European countries and uses wood from sustainable sources for its operations.
“Sawmills, pulp and paper mills, plywood factories and the furniture industry are some of the Bank’s clients in the forestry sector,” explains the Juhani Numminen, Senior Adviser for Pulp, Paper and Forest Products Industries at the EBRD. “A few of them are forest owners and logging operators, but in general most of our clients are buying wood rather than logging themselves.
The EBRD is also increasingly investing in biomass energy projects using forest resources for fuel supply, Mr Venermo adds. “Naturally our sustainable forest management principles and requirements apply to these projects as well.”
Ensuring the use of sustainable wood
No matter the exact nature of the activity, the EBRD requires its clients to adhere to rigorous standards to ensure that all wood used is of legal and sustainable origin. This includes, of course, that it does not originate from protected areas or forests with a high biodiversity value.
For companies directly involved in logging, this means that they have to ensure all forest areas are certified to internationally accepted standards of sustainable forest management and that their wood is harvested in a sustainable way.
Similarly stringent rules apply to clients who are relying on external suppliers. When procuring wood, they have to ensure that the material does not originate from protected forests, the origin of wood is monitored and their suppliers operate in accordance with the principles of sustainable forest management.
By implementing these requirements, the EBRD’s clients are spreading sustainable forest management practices to local harvesting companies and helping create a market for certified wood from Bratislava to Vladivostok. This is an important contribution to the EBRD’s transition impact in the forest industry and biomass energy projects.
“We are also promoting sustainable forestry very comprehensively in our policy dialogue with governments,” Mr Venermo explains. “We are raising awareness of unsustainable practices, such as illegal logging, and helping them develop legal, enforcement and governance systems towards sustainable forest management.”
If such systems do not exist, investors need to establish their own tracking and control systems to manage the business and reputational risks associated with illegal logging, Mr Venermo adds. “Needless to say that these measures come at a high cost to the companies and affect their competitiveness.”
Good investment potential
Several EBRD studies have analysed in-depth the investment potential and constraints in the forestry sector. “They have helped to identify sustainable ways in which the logging volumes could be increased from the current level, while at the same time ensuring that appropriate forest areas are protected,” Mr Numminen points out.
A recently published survey focused on how to attract forest industry investments to the three Russian regions of Vologda, Krasnoyarsk and Khabarovsk compared with competing investment destinations elsewhere on the planet. With approximately 800 million hectares of forest, Russia has access to nearly a quarter of the world’s forest resources yet produces only 3.5 per cent of the world’s forest products. Moreover, about 18 per cent of the country’s workforce lives in communities depending on economics associated with the Russian forests.
The EBRD survey explores the use of existing best practices from within Russia and practices developed in countries competing with Russia for forestry investors. The study found that the three Russian regions hold certain advantages, such as the low cost of wood, compared with forest operations elsewhere.
However, the emergence of efficient and fast-growing forest plantations in South America and China is a new challenge to Russia. Due to climatic differences and lack of forest management trees grow six to ten times slower in Russia than in a plantation in Uruguay. This is why a forest logging area needs to be very large in Russia to support, for example, a new pulp mill. This problem can be addressed by facilitating infrastructure investments and several other measures, the survey suggested.
Eric Rasmussen, the EBRD’s Director for Industry, Commerce and Agriculture in Russia, added that top players in the forest industry agree that Russia has good potential, but the risk and reward must have a better balance to realise investment. Among other investment-hungry countries, Brazil has established a very competent force, which is maintaining a dialogue with the top 10 forest industry players. The taskforce is determined to attract investors and empowered to discuss reforms and support needed for investment projects – an example which Russia may want to follow in the future.