What Does It Mean For Chinese Forest Products Companies To Go GREEN?

CHINA has proven comparatively resilient against the global economic downturn. As the Chinese forest products industry continues to grow, many challenges, but also opportunities, still lie ahead. To maintain high growth rates in the face of weak export demand and rising production costs, the industry is looking to stoke domestic consumption. It is also starting to embrace environmentally sustainable business strategies as a way to stay competitive in a global marketplace increasingly concerned about source of wood used in everyday products, and assurances of legality and sustainability all along the timber supply chain.

Exclusively for our newsletter "Responsible Markets Communication", experts from leading environmental groups worldwide discussed prospects for increased integration of environmental considerations into business development in China and explore the question: Does it pay to go green?  For example, how does pursuing forest certification improve business bottom lines for the Chinese forest products companies?

Experts Interviewed:

• Richard Donovan, Vice President & Chief of Forestry Division, The Rainforest Alliance (RA)
• Vincent van den Berk, Programme Coordinator, EFI’s EU FLEGT Asia Regional Support Programme
• Hilary Thompson, Director, The Forest Trust (TFT)

Q: For those who are less familiar with your organization, please provide a short description of your organization and current activities in China (or Asia-Pacific region).

RA: The Rainforest Alliance is an international non-profit conservation organization.  We began working globally in 1986, started working in Asia in 1989 and in China in 2001.  With funding from Ikea and others, our major focus in China has been on guiding forest managers and forest products manufacturers to meet sustainability certification and legality requirements around the globe. Our forest certification program, SmartWood, granted China’s first FSC forest management certification, and we are currently implementing legality verification throughout the Asia-Pacific region.  We are also rapidly expanding our work in sustainable agriculture, forestry and tourism throughout the Asia-Pacific region in agriculture to both conserve forests and improve livelihoods.  

EFI: The European Forest Institute’s EU Forest Law Enforcement, Governance and Trade (FLEGT) Asia Regional Support Programme, commonly known as “FLEGT Asia”, promotes good forest governance in the Asian region. FLEGT Asia aims to achieve this by strengthening regional cooperation in forest governance and by promoting and facilitating international trade in verified legal timber. The collection and sharing of information such as trade statistics, market developments, baseline studies and stakeholder analysis is an important first tier of FLEGT Asia’s work. In order to support the relevant stakeholders such as civil society, the private sector, and government agencies, FLEGT Asia carries out capacity building activities to support these stakeholders in improving forest governance. FLEGT Asia also collaborates with other regional programmes to complement and support actions already taking place in the region. In China, FLEGT Asia supports the EU – China Bilateral Coordination Mechanism (BCM) on FLEG and the implementation of jointly identified activities. In addition, FLEGT Asia supports research, awareness raising and capacity building activities in China.

TFT: The Forest Trust (TFT) is an international non-profit organisation that works with companies to ensure that the products they produce and sell are responsible, meaning that they benefit both people and the environment throughout all stages of extraction and production. Since our founding in 1999 our main focus has been to provide solutions to the issue of deforestation and the empowerment of forest dependent communities. We have helped companies transform their timber supply chains and stop forest destruction. Through the same model, we involved institutional donors and individuals looking to build capacity on the ground thus giving communities and local companies the tools to provide responsible wood products to world markets. Now with offices in 14 countries, we’re working on a broad range of product using our supply chain expertise to identify and address the social and environmental issues embedded in them with a strong focus on natural resource management and traceability. From forests and farms in Indonesia, Brazil and Cameroon to factories in China and India and retail stores in Europe and the US our experts are on the ground making real change happen, helping businesses and communities deliver Responsible Products. 

Q: At this time when Chinese forest products industry faces great pressure to stay competitive globally, what does it mean for the industry to “go green”?

RA: It means clear and transparent mechanisms for tracking raw materials back to the forest source, ensuring legal sources of raw materials while clearly moving in the direction of certified, sustainable sources.  Consumers and regulators around the globe are demanding this.  They want assurance that companies have systems in place that protect forests, create sustainable/safe livelihoods for communities and workers. And by implementing sustainable business practices, companies can ensure a dependable source of raw materials well into the future.

EFI: The demand for green products is increasing globally. The timber industry is one of the many industries that sees a growing demand from its consumers asking for green products. “Green” means that a company reduces its impact on the environment. So in the case of the forest products industry, it means that the companies need to find out what impact their products have on the environment, or more specifically, on forests. The key to this is supply chain management. By knowing where one’s materials are coming from, how the timber was harvested and what else happened earlier in the supply chain, a company can assess the environmental impact of its production process. In the near future, the management of the supply chain will become increasingly important in the forest products industry. Several regulations, among them the new EU Timber Regulation, have recently been put in place to stop illegally harvested timber from entering certain markets. An important element of these regulations is the so-called timber legality assurance system (TLAS). This means that operators on these markets need to be aware where the timber in their products was sourced from so they can prove it came from legal sources. Hence, one of the facets of “going green” is good supply chain management. It not only allows companies to efficiently manage their supply chains, but it can also be used as a tool to assure one’s customers of the legality of the products. With this, companies can maintain market access to environmentally sensitive markets.

TFT: For businesses there has to be an understanding that ‘going green’ isn’t a ‘nice to do’ but is a ‘must do’ in a global economy where natural resources are coming under huge pressure. Identifying and sourcing sustainable raw materials is  an essential move for any business  to continue to grow.  The key strategy must be sustainable economic growth that respects the environment and improves people’s lives.

Q: Does it really pay to go green? If so, by what measure(s)?

RA: It can pay in three different ways.  First, better inventory management, traceability and chain-of- custody systems allow companies to improve the efficiency of their sourcing, thereby saving money.  Second, government and private sector markets are putting pressure on their suppliers to guarantee legality and sustainability.  Thus, in order to compete or maintain/increase “market share”, businesses must embrace a “green” approach.  Finally, being green is one aspect of becoming a more dependable supplier or business partner.  Many of the organizations we work with are looking for long-term supply chain partners, for mutual business growth.

EFI: The new EU Timber Regulation will be applicable from the 3rd of March 2013. From this date onwards, the EU market will only accept legally verified timber and wood products. This means that companies that do not comply with the EU Timber Regulation cannot get access to the EU market anymore. There are other initiatives in for example Australia, Japan and the US that have similar “green” requirements. Therefore, it is worth investing in becoming more “green” to regain market access to these environmentally sensitive markets, especially taking into consideration that these markets often pay premium prices. Hence, it pays to implement procedures that help verify that companies’ timber comes from legal sources.

TFT: It does pay to go green in the medium to long term- short term advantages can always be found but  if companies take a sustainable and  strategic view of all  their business behaviors, this will  translate to improvements on the bottom line. For example in a world where deforestation is a real and continuing issue, securing a reliable source of sustainable timber is crucial for a company needing this increasingly limited raw material.

TFT believe strongly in transparency in supply chains and we work with our members to achieve this in their supply chains. It makes good business sense to know what is going on in your supply chain- and this transparency can drive more efficient costing.

Q: Can you share some examples of “successful” green businesses in the industry?

RA: I will give three examples.  The Rainforest Alliance has been working with the pulp and paper company Domtar for over ten years.  Domtar aims to source 100% of forest raw materials from FSC-certified forests. For the company, this has proven both commercially and philosophically satisfying, and has positioned them well for future growth.

For the past 6 years we have worked closely with IKEA, which through its global “I-Way” program, is requiring suppliers to move from “unknown” to FSC certified forest products, particularly solid wood products.  Ikea is providing both guidance and support for their efforts. By improving both the dependability of their supply chain, and maintaining good value, Ikea can provide their customers with the reasonably priced, well-designed products they are accustomed to. 

TFT: There are many  examples in China  of businesses who have understood that green business can be good business- in particular those who sell to environmentally sensitive markets in Europe and N America.TFT has been working with smallholder farming families and communities in SE Asia since 2003 and in 2005 TFT helped communities in Southeast Sulawesi, Indonesia to secure the first ever smallholder group FSC certificate in SE Asia. The group is now counting over 600 farmers and has maintained its FSC certificate since it was first received.  Since that achievement TFT has also assisted KOSTAJASA, a community cooperative in Central Java attain FSC Certification for mahogany, and Luang Prabang a community teak  forest project in Laos also recently became FSC certified, with help from TFT. In China TFT via the EU funded TTAP programme  helped the whole supply chain of Sainty Bancom get  VLO verified including the  setup of  a group of poplar farmers involved as the first ever VLO’d Chinese supply chain.

Q: What advice do you have for global investors and entrepreneurs interested in investing or launching in a forest products company in China?

RA: First and foremost, do your due diligence, on the ground, with knowledgeable advisors.  There is zero substitute for having strong local expertise and guidance.  Second, do deep research on potential business partners and make sure that you have the same business goals and core values as investors or entrepreneurs, in practice, not just theory.  Lastly, make sure that your business model is built on a solid foundation of sustainable practices, accountability, and sourcing/supply chains that will respond to the needs of your target markets.  If your market is North America, Europe, Australia, New Zealand or Japan, increasingly you need to respond to demand for products that are certified to the highest standards of legality and sustainability.    

EFI: The traditional advantages of investing in China for many global investors and entrepreneurs are the inexpensive labor, relative loose environmental and social regulations and favorable taxation policy for foreign investment. However, all of these are gradually fading away, if not already. For timber business, the scarcity of raw material and the associated cost increase require both higher degree of global sourcing competence or technological innovation. Global sourcing is subject to compliance to the laws and regulations of foreign countries and leads to higher degree of complexity for supply chain management and due diligence. This is where the majority of domestic producers are still weak in. For those who are attracted to the lucrative Chinese domestic market, demonstrated strength in these two areas will certainly translate to great advantages.

TFT: Our advice would be to ensure that there is full supply chain transparency in place in order that all the forest products produced will be ‘responsible products’. That is that throughout the supply chain the environment is protected and people’s lives are improved. This means for example sourcing sustainable timber, using environmentally low impact raw materials and ensuring good factory working conditions.

Q: Tell us about your future plan to help the industry become more sustainable.

RA: We will continue to build upon our nearly 25 years of pioneering work to transform mainstream forest products companies, food and beverage companies, and tourism companies to sustainable sourcing, supporting the protection of critically endangered ecosystems, and supporting communities that depend on forests for their survival.  We will continue to partner with companies and non-profit organizations focused on these same goals. Our work in China will continue to involve orientation around sustainability certification, legality verification, enhanced value chains and we will continue to seek synergies among the different with which we work. If a company is already buying sustainable coffee beans, we want them to start using certified paper for their cups and napkins. If a farm or community forest has a tourism operation, we want to make sure it’s run sustainably. Because we work across so many types of supply chains, including coffee, cocoa, tea, bananas, paper, furniture, building materials and tourism, we see endless opportunities to improve sustainable business practices on all levels.

EFI: FLEGT Asia is launching a number of projects aimed at raising the awareness of Chinese industry on the sustainability requirements of major consumer markets and the tools available to meet those requirements. For example, we are supporting industry media to widen and deepen its coverage on the EU FLEGT Action Plan and the EU Timber Regulation as well as concepts such as supply chain management, responsible sourcing and due diligence. To amplify the impact, outreach activities are being carried out at trade events and through local trade associations. FLEGT Asia is also looking into supporting the initial stage of the development of an information portal for Chinese companies which are in need of reliable information in relation to timber requirements in major consumer markets.  A study on Small and Medium Sized Enterprises (SME) is underway to enable better understanding of the impacts of changing market requirements in major consumer markets and the likely responses of Chinese companies to such changes.

TFT: TFT will continue to   use our supply chain expertise to identify and address the social and environmental issues embedded in them with a strong focus on natural resource management and traceability and we have a 5 step approach to this:

1. Map the supply chain identifying key social and environmental risks
2. Set up traceability systems all the way back to the raw material sources
3. Provide technical assistance on the ground to help tackle key sustainability risks
4. Achieve legal compliance and  certification
5. Communicate your changing product story to stakeholders

TFT  also  has in   development  an internet tracking tool called SURE will which provide easy access    traceability and transparency to all the players in the supply chain- from the manufacturer to the retailer to the consumer- this is the future!

(END of interview)