THE PRICE OF DOING GOOD
The struggle of two Asian resources companies to engage their critics and prove their corporate social responsibility credentials holds lessons for others in the region.
By Cesar Bacani

Imagine Hong Kong and Singapore as tropical forests, and multiply their combined acreage by two. Add six tree-filled Macaus for good measure, and you will get a total area of 332,000 hectares – just about the size of the massive forest concession in Indonesia of Singapore-headquartered Asia Pacific Resources International Holdings (April). The company’s pulp-and-paper mill complex alone occupies 1,750 hectares – only slightly smaller than the entirety of Macau – in Kerinci on the island of Sumatra. Asia Pulp and Paper or APP, Indonesia’s other giant pulp-and-paper company, has a smaller concession of 189,000 hectares, but that is still three times the size of Singapore.

“We’re already one of the world’s leading producers of fiber, pulp, and paper products,” says April CFO Willie Sia. The privately held company – it was delisted from the New York Stock Exchange in 2001, a victim of the Asian financial crisis and instability in Indonesia – had gross sales last year of US$1.3 bn, not too far from Sweden’s Holmen and Japan’s Mitsubishi Paper, though miles behind global leader International Paper, which has annual turnover of US$24 bn. But April’s moderate size doesn’t keep it from being a target of the world’s activist groups. On its UK website, Friends of the Earth accuses the company of destroying “large areas of rainforest on the wildlife-rich island of Sumatra” and calls on consumers to boycott its products. “As long as April and APP continue to clear-cut natural forests,” fulminates Robin Wood, a forestry advocacy group in Germany, “businesses, governments, and non-governmental organizations should freeze their relationship with them.”

Over on another resources-rich Asian island, Mindanao in the Philippines, Sagittarius Mines, which is controlled by Australian exploration firm Indophil Resources, is also a target of opprobrium. In January this year, the Catholic Bishops Conference of the Philippines called for the closure of Sagittarius’s Tampakan Copper-Gold Project because of environmental and health concerns, the dislocation of indigenous communities, risks to health and livelihood, and damage to the environment. “We say absolutely ‘no’ to mining,” declares Bishop Dinualdo Gutierrez, whose Marbel diocese covers part of the Sagittarius concession. Those who back Sagittarius, he warns, would “suffer the wrath of God.”

In the boom years of the 1980s, resources companies would have simply shrugged. Customers then bought mainly on availability and price, and governments were more interested in investments than in environmental issues. But the internet and the current corporate-governance revolution appear to be upending these old verities. “It’s no longer even possible to go to a remote part of the world and have people unaware of your previous track record (because of the internet),” says Paul Dominguez, president and CEO of Sagittarius. Especially in the West, corporate social responsibility (CSR) programs are becoming a key issue in winning government licenses, bank financing, and even customer and partner support.

Little wonder that April and Sagittarius, along with other Asian resources companies like APP, palm-oil producer Astra Agro Lestari, and oil giant PetroChina, are attempting to burnish their CSR credentials. So too is embattled US mining company Freeport-McMoran Copper & Gold, which has been accused by non-government organizations (NGOs) of paying the Indonesian military to harass villagers who protested the pollution of their land and rivers in the Indonesian province of Papua. April spent 34 bn rupiah (US$3.7m) last year on community development projects and is on the verge of signing an agreement with the World Wildlife Fund (WWF) to protect high conservation value forests (HCVFs) within its concession area. APP already has such an agreement with SmartWood, another environment group. Sagittarius, not yet in the start-up phase, is amid an 18-month study to judge the value of the concession and the feasibility of mining. Nevertheless, Indophil is already spending nearly US$1m on community projects.

It’s too early to judge their success. While Friends of the Earth and Robin Wood continue their broadsides against April, WWF actually has kind words to say. “We believe that the cooperation (with April) will lead to important conservation improvements on the ground,” says Nazir Foead, WWF Indonesia’s negotiator with the company, noting that April has agreed to protect HCVFs in all its concessions globally. (April also controls Asia Pacific SSYMB (Shandong) Pulp and Paper in China.) In the Philippines, the Catholic Church still refuses to engage with Sagittarius, but the company appears to be making headway with local government officials and tribal chieftains, whose ancestral domains comprise a large part of the concession area, and who see April as a needed provider of jobs and royalties.

Much depends on the companies following through – and there’s the rub. April and Sagittarius can go only so far and still remain commercially viable. “You have to find a balance,” says Indophil managing director Tony Robbins. “If you can’t make a profit, you obviously can’t continue the business.”

What’s the Real Cost?

CSR programs can be expensive, but are they prohibitively so? Many profitable companies invest in them in what seems to be more than a mere publicity campaign. Wal-Mart, the perpetual target of US political and NGO criticism, recently pledged US$500m a year on improved medical benefits for its workers in the US as well as more efficient use of energy throughout its organization. To CEO Lee Scott, 0.2% of Wal-Mart’s annual sales of US$288 bn is probably a feasible cost to strike that balance.

But to the more radical fringe of the CSR debate, the right balance that allows for some profitability is not the issue. In their view, companies face a moral obligation to the communities where they operate to protect the environments from which they draw the materials for their products. Fulfilling this obligation is the ‘license to operate’ that society grants them. April and Sagittarius may spend millions on community development, on third-party auditors to verify environment practices, and on sustainability reports. And it is still never enough for some activists.

April won’t break out complete expenditures on CSR initiatives, and, on paper, the US$3.7m in direct costs for its community programs – again, about 0.2% of last year’s revenues – does not seem an onerous price to pay for CSR. The most April will do is itemize the other expenses devoted to its CSR initiatives (see “A Cross to Bear?”, next page). As expensive as those costs may be, both April and investors in Sagittarius deem them necessary. The programs at least give them a ticket to engage in a fair fight for access to resources needed for their expansion and future profits.

CSR is particularly important to April because it sells 40% of its paper products to Europe, the base of the world’s most rabid pro-environment warriors and home to consumers who are beginning to demand that forestry companies practice sustainable forest and plantation management. April is also looking to sell to the increasingly green US, where paper-making capacity is shrinking for lack of new investments. Then there is prospering China and its voracious appetite for pulp, paper, and virtually any other commodity – there are signs that the Chinese are becoming environmentally conscious too.

As for Sagittarius, doing good this early is simply a matter of survival. With the Catholic Church in opposition, the mining project’s backers are aware that they could be sent packing if the political heat gets too intense. The Philippines is the land of People Power protests, after all, even if the government of President Gloria Macapagal-Arroyo appears strongly behind mining at this time. By cultivating local communities and political leaders, Sagittarius is trying to amass goodwill to counter the clergy and retain the support of investors and bankers.

A Night in Kerinci

April says its CSR initiatives are already reaping dividends. Its marketing executives in Europe report that potential customers are more receptive after learning that global certification group SGS audits April’s wood purchases. April’s bi-annual Sustainability Report, started in 2002 and verified by the Paris-based social-accountability agency Bureau Veritas, is also proving to be a useful marketing tool. Bankers, too, are reassured. “Ten to 15 big banks come to visit with their global heads every year, even though we’re not asking for new loans,” says CFO Sia. April has debts of US$1.2 bn that date back to the 1997 Asian financial crisis. The company has reached agreement with its lenders to capitalize part of the interest owed them.

One major customer, UPM-Kymmene, has been attacked in Europe for doing business with April. “So they send a senior management team every six months to see what’s going on,” says April’s president, AJ Devanesan. “They go to the forests, they talk to the villagers. Being foresters themselves, they know what to look for and interpret what they see. Based on their visits, they can tell their detractors back home that we are a good company.” Those critics and others inside and outside Indonesia are also welcome in Kerinci. “We have an open-door policy,” says Devanesan. “Visitors can talk to anyone.”

Guests are welcome to tour the pulp mill and the nearby paper-making facility in Kerinci, as well as the 36,250-hectare Tesso estate, which borders Tesso Nilo National Park, home to the endangered Sumatran elephant and tiger. At Tesso, plantation managers bring visitors to a 150-hectare forest area that April has left untouched because of its high conservation value. Guides point to elephant droppings and a tree with tiger claw marks.

In the nearby plantation, contractors harvest the trunks and branches of six-year-old acacia, leaving leaves, bark, and roots to enrich the soil that other contractors will soon plant with seedlings. A constant stream of trailer trucks brings logs of various sizes to the mill an hour’s drive away. The road from Tesso ends on the banks of the 413-km Kampar River. April’s guards are supposed to check the papers of the trailer trucks before they can board the lone ferry, one of the procedures designed to ensure that illegally logged wood from the national park does not get to the mill, or to any other user.

April’s guides note that the company takes about 323,000 cubic meters of water per day from the river, then discharges part of it as waste water. But April says its effluents are well within water-quality specifications set by Indonesian law and the US Cluster Rule for new mills, as monitored by independent third parties such as the state-owned inspection company Sucofindo. For the rest of the tour, executives stress the company’s environmentally friendly practices. For example, the 435-megawatt power plant has been weaned from coal: 97% of the energy produced now comes from wood bark and pulp by-products.

April produces 2m tons of pulp that are sold to paper makers and other customers mostly in Indonesia and the rest of Asia. About 12% of the pulp mill’s production goes to the paper mill, which turns out 350,000 tons of paper per year. These hungry maws must be fed with 9m cubic meters of fiber every year, an enormous mass of material that April aims to source exclusively from renewable sources by 2009 – that is, entirely from acacia and other tree plantations, no longer supplemented by wood from the forests.

The tour also includes a visit to a training center attached to a small working farm. April trains local communities to practice integrated (and environmentally friendly) farming, and supplies them with cattle, seeds, and other resources. The program is extremely popular, but April can do only so much. The solution: it recently spun off its Community Development Department into the non-profit Care and Empowerment of Communities Foundation. April will remit funds to the new non-profit body, which will implement the company’s community development programs, but will also have the flexibility to raise money from agencies like the World Bank for non-April projects.

When Bishops Attack

April’s engagements with many of its critics have an element of give and take. But at Sagittarius the mood is already contentious long before any shovel has pierced the ground. While the company has determined that Tampakan sits on copper deposits (and associated gold veins) reckoned to be the fifth-largest in Asia and worth some US$23 bn, Sagittarius is still in the pre-feasibility study stage to determine whether mining those minerals makes economic sense. There is essentially nothing to see – no pit, no tailing dams, no waste water – save for rigs drilling for more samples within the 1,400-hectare area where the deposits are concentrated.

The project is a magnet for strong and emotional opposition. Sagittarius is caught up in a national controversy over the Mining Act of 1995, whose implementation had been in limbo until the Philippine Supreme Court ruled in 2005 that it was legal. Opponents had questioned the constitutionality of the law because it allows foreigners to own 100% of a mine under certain circumstances. The Tampakan concession had been the test case, filed when it was still controlled by Australia’s Western Mining (now part of BHP Billiton). In part because of the legal problems, Western transferred its rights in 2002 to Indophil (Robbins was a former Western Mining executive). Sagittarius started the pre-feasibility study in 2005 after the Supreme Court ruling.

Given the bishops’ opposition, Sagittarius clearly needed to burnish its CSR credentials. Another impetus is an option agreement with mining giant Xstrata, which expires this September. If exercised, Xstrata will purchase 62.5% beneficial ownership of Sagittarius, leaving Indophil with 32.5% and Alsons, a Philippine conglomerate controlled by CEO Dominguez’s family, getting 5%. The deal will give Indophil access to new funds and technical and operational expertise. Before signing on, however, Switzerland-based Xstrata, whose stock trades in London, wants to make sure that all legal, technical, and social matters are in order, including the CSR program.

The first part of Sagittarius’s two-pronged CSR effort focuses on planning for the effects on the environment if and when full-scale mining starts. This includes baseline studies on water and air quality, soil and sedimentation, and health conditions conducted with Notre Dame of Marbel University, Leyte State University, and University of the Philippines. It was quite a coup to persuade Notre Dame of Marbel to sign up, since it is run by the Catholic Church, although the researchers made clear that their participation is purely as scientists and does not imply endorsement of the mine.

Sagittarius is not unaware of the symbolic value of being seen as engaging with some parts of the Church. In March, the company brought 29 village leaders to Cebu province to observe the workings of Atlas Consolidated Mines, which discontinued operations in 1994 but is now being rehabilitated. A mass was celebrated and the visitors heard a pro-mining homily from a priest who extolled the benefits that Atlas had brought to the community. The event and the contents of the priest’s sermon somehow found its way to the national papers. The company also makes much of the fact that its environment manager, Jose “Butch” Sebua, is a native of Tampakan. Says Rolando Doria, Sagittarius’s community and government affairs coordinator: “I tell people: ‘Do you really think that Butch will allow his hometown to be destroyed by mining?’”

Sagittarius initiated what it calls swift-impact environment projects aimed at showing the community that the mine will bring benefits even at this early stage. The most visible is a reforestation program to re-green 500 hectares of degraded land around the mining site. So far, about 25,000 forest trees, fruit trees, and bamboos have been planted by local inhabitants, who are paid by the company to care for the seedlings. Every visitor to the mine is asked to plant a tree, a symbolic way of bonding them to the project.

The second prong of Sagittarius’s CSR effort focuses on the communities around the mining site, particularly the Bla’an indigenous people. Western Mining had promised to negotiate with the Bla’an and other villagers for the right to conduct exploration and actual mining in exchange for royalties. It obtained agreements with everyone except the Salnaong community, which was strongly influenced by the church. But Sagittarius persuaded the Salnaong Bla’ans to sign on in 2004, prompting Bishop Gutierrez to tell reporters: “You know the general behavior of the natives. They give their consent in exchange for material things. I don’t know whether they really made an independent decision or were simply duped.”

Education is a key plank of Sagittarius’s community outreach, along with health and livelihood programs. Last year, it spent 7.2m pesos (US$141,000) on grade-school, high school, and college scholarships for some 6,800 young people. “We want to build up people’s capabilities, not give them handouts,” explains company president Dominguez. That philosophy also informs Sagittarius’s annual cash contributions of 7m pesos to the five Bla’an communities, representing advances against their royalties of 1% of gross revenues of the mine. As ex-officio members of the tribal foundations that administer the money, company representatives have convinced the Bla’an decision-makers to set aside 40% of the allocations for education. The company is also training the Bla’an on budgeting, investing, and prioritizing spending to prepare them for the time when they will be getting millions in royalties.

Great Expectations

Activist groups still harbor doubts. “Internally, companies are trying to get a sense of the strength of the environmental movement and balancing it against the increased profit they can get by continuing business as usual,” reckons David Kaimowitz, who until July was the long-time director-general of the well-regarded Center for International Forestry Research. “If they can get away with PR as alternative to making real changes on the ground, they will continue the same practices.” He thinks HCVF agreements are a step in the right direction, but points out that protecting slivers of forests is a very narrow agenda.

The real test for pulp-and-paper companies, says Kaimowitz, is action on broader issues such as 100% sourcing from plantations instead of natural forests, stopping illegal logging, dealing with forest fires, and forging socially responsible relationships. He concedes that April is making progress in these areas, but says it can and must do more. In the case of mining companies like Sagittarius, the expectations include iron-clad procedures for the safe storage and disposal of waste, and rehabilitation once the concession ends. Sagittarius is under pressure to conduct underground mining, which would at least preserve part of the site’s surface area. It is considering the idea, but describes the cheaper but far more destructive open-pit method as providing “the most viable economic outcome.”

Meeting these great expectations can potentially dent the bottom line. Activists contend that green products will fetch premium prices, but Devanesan says April is not finding this to be the case. Even in Europe, customers still expect green goods to be priced the same as non-green products, even though they may shun the non-green items. He estimates that CSR adds US$3 per ton to the production cost of April pulp. That’s not too much of a burden, assuming that cost efficiencies and productivity gains continue to keep overall costs at or below those of competitors. But the HCVF program can be expensive. As it is, April says it needs more land to convert to plantations because large chunks of its original concession turned out to be inhabited.

One way out is to shorten the harvestable period from six years to five while increasing the girth and density of the trees, a Holy Grail the R&D department is zealously pursuing. The company has been granted new concessions, but the land is in peat forests that are vulnerable to fires, the cause of the haze that periodically blankets Singapore and Malaysia. Environmental groups decry the commercialization of the virgin peat areas. Another April tack is joint ventures with other concession holders and small farmers on community land. But there is no guarantee the partnerships will last – it is faster to make money off oil palms, which fruit in only three years. There are other issues. In May this year, April’s reputation got a shellacking when security guards in a joint-venture estate figured in an armed fight with people attempting to convert part of the concession area into a palm oil plantation. April says it will tighten oversight and other procedures to avoid a repetition.

The ultimate aim is to source all of the mill’s wood needs from self-sustaining plantations by 2009, a target that was originally set for 2008. “We’re on track,” says Devanesan. But environmental activists are skeptical, given the massive logistics involved – 100m seedlings need to be planted every year on 1,500 hectares of cleared land.

“We are not in a position to give an estimate of whether April will meet its stated 2009 target,” says Kaimowitz. “But in our recent meeting with them, we did gain some clarity on what this target actually means.” The plan apparently applies only to existing facilities in Riau, and not to any new capacity in Indonesia or China that may come online between now and 2009. Says Kaimowitz: “Many may be surprised that April’s commitment to environmental sustainability is defined as narrowly as it is.”

It’s clearly not easy being green, even with the prodding of customers, bankers, and regulators. But companies may have no choice. Going forward, China may be the tipping point for CSR in Asia. “Companies are trying to assess if China is going to go green, like the European markets are,” says Kaimowitz, noting that the world’s most populous nation is in many ways the most important future market for Asian businesses. “I’m not a pessimist on China,” he adds. “I think China may very well turn out to be rather green.” If he is right, many more of Asia’s companies, not just the likes of April and Sagittarius, will have to jump into the business of being good. Good luck to them.