Banks move to stop logging finance but gaps remain

ACT NOW! and Jubilee Australia

Papua New Guinea’s two largest banks – Bank of South Pacific (BSP) and Kina Bank – have recently taken positive steps towards ending their financing for destructive forest logging. Kina Bank has released a new policy that prohibits financing for commercial logging operations in primary tropical moist forests and taken steps to review their exposure to logging in general and close accounts.  BSP has also published for the first time an environmental and social risk management statement and has taken steps under its anti-money laundering regime to close the accounts of at least 30 logging companies.

These are welcome steps forward that will help to ensure PNG’s banking sector is not implicated in illegal and unsustainable logging. However, it is not the end of the story. In particular, the banks’ new published policies do not prevent them continuing to provide transaction accounts and other services to logging companies. 

Act Now! and Jubilee Australia are encouraging both BSP and Kina Bank to build on the important steps they have already made and to end all banking services to companies involved in tropical forest logging. 

Forests under threat
Papua New Guinea’s forests have been under threat for decades as a result of a logging boom that has seen the country become the world’s largest exporter of tropical round logs. Logging is a major contributor to forest loss in PNG – responsible for 81% of forest loss between 2002-2014 - and poses a threat to the region’s biodiversity and carbon stocks. Illegality and human rights abuses in PNG’s logging sector are rife, leading the Bank of PNG to label the logging sector a significant money-laundering risk.

In December 2021, Act Now! and Jubilee Australia released a report, The Money Behind the Chainsaws, which revealed that commercial banks operating in Papua New Guinea had given at least K300 million (AU$144 million) in available credit, since 2000, to the country’s five largest exporters of tropical logs. The report particularly highlighted the roles of PNG’s largest banks – Bank of South Pacific (BSP) and Kina Bank – and the current or recent financing they had given to logging companies. 

Since the release of the report, Act Now! and Jubilee Australia have continued to engage with BSP and Kina Bank, and their investors to encourage action. Both BSP and Kina Bank have now released summary statements outlining their environmental, social and governance (ESG) policies and have taken steps to exit some customer relationships. 

Kina Bank’s policy – strong statement on logging, but room to make it comprehensive
Kina Bank published a summary of its new Environmental & Social Management System (ESMS) Policy in April this year. The policy articulates Kina Bank’s ambition to “be a more responsible and ethical corporate citizen, reduce its environmental impacts, and increase its contribution to Papua New Guinea’s societal objectives.” It applies to “all relevant operations, including business loans and overdrafts, business-related asset finance, and trade finance”. Before providing financing to a client, Kina Bank will screen their business and activities against the policy and identify any ESG risks.

Crucially, the policy sets out a clear list of exclusions – activities which will prevent Kina from providing financing to a client. This list includes “Commercial logging operations or the purchase of logging equipment for use in primary tropical moist forests or old-growth forests”. This clear recognition of the destructive impact of tropical forest logging is very welcome and sets a standard that all the commercial banks operating in PNG should follow. 

However, the policy could go further – in particular, its application only to business loans and overdrafts, business-related asset finance, and trade finance leaves important gaps, in particular relating to transaction accounts and bank guarantees.

Bank guarantees
Both Kina Bank and BSP have historically provided bank guarantees to their logging industry customers. Kina Bank though has informed Act Now! and Jubilee Australia that it is undertaking a review of its exposure to logging related bank guarantees and it is likely a majority will not be renewed in the future.  It will, however, continue to provide guarantees to customers who meet ‘responsible and sustainable’ logging standards which are still being developed.

Kina Bank’s transaction accounts
Kina’s new policy also does not exclude it from providing transaction accounts to logging companies or other services such as foreign exchange. 

Analysis of log export data from 2019-21 by ACT NOW and Jubilee reveals nine logging companies that appear to hold accounts with Kina Bank.

Kina has indicated that it is reviewing its transaction accounts under both its anti-money laundering and ESMS policies and will close the accounts of those customers that do not meet responsible and sustainable logging standards. 

Act Now! and Jubilee commend the steps taken by Kina Bank to review both its transaction accounts and bank guarantees. These are vital to ensure the banking system is not supporting illegal and unsustainable logging given the important role that both transaction accounts and bank guarantees play in lending legitimacy to logging operations that would otherwise be considered illegitimate. We encourage Kina Bank to continue this work and to close all accounts and exit guarantees with companies engaging in large-scale logging of primary rainforests. In particular, services should not be provided to companies that have been found to have engaged in illegal activity or human rights abuses - including breaches of the Forestry Act and logging without consent of the customary landowners. 

BSP – laudable action but a lack of policy clarity
BSP published its Environmental and Social Risk Management (ESRM) Disclosure Statement in June 2022. The statement says that the bank’s ESRM policy approach “supports our objective of being an environmentally and socially responsible financial group and ensure[s] our customers invest in a sustainable environment”. It indicates that the application of the policy provides a process to identify, evaluate and assess the environmental and social risks associated with lending decisions and that its requirements are linked to international best practice.

Unlike Kina Bank, BSP has not published a list of excluded or sensitive sectors in the statement issued online, but does note that it will “consider all transactions and the sector or industry in which the client operates when conducting environmental and social due diligence on a transaction”. In previous correspondence with Act Now! and Jubilee Australia, BSP has advised that, in compliance with its ESRM policy, “all logging activities including production or trade in wood and other wood products sourced from unsustainable managed forest are considered excluded activities”. 

Where gaps are found between a client’s environmental and social plans, policies or practices and international standards, BSP will develop an Environmental and Social Action Plan (ESAP) to “satisfactorily remediate the identified areas”.

Like Kina Bank’s it appears that BSP’s policy only applies to part of its business, with the statement referring to “lending” and “financing”. As noted above, transaction accounts and bank guarantees are important parts of the banking system relied upon by logging companies – the policy statement should be clarified to clearly indicate whether those areas are included or excluded. 

Despite BSP’s vague policy commitments, its actions in recent months have sent a strong message that illegal logging will not be tolerated. A report in The National in April stated that BSP had closed the accounts of “about 30” logging companies operating in PNG, and outlined concerns by the PNG Forest Industry Association, a group representing commercial logging interests, that Bank of South Pacific (BSP) had closed the accounts due to its anti-money laundering best practices.

In communication with Act Now! and Jubilee Australia, BSP indicated it has been undertaking a review of its customers in the forestry sector and is reducing its portfolio to companies to those where it is possible to undertake comprehensive due diligence. They also mentioned that this review goes beyond lending to transactional banking and bank guarantees. These moves are commendable and will go a long way to ensuring that PNG’s banking system is not exposed to actors engaged in illegal logging.

The last six months have seen some very significant steps forward in PNG’s two largest banks’ recognition of the environmental, social and governance risks of providing financial support to large-scale logging. While much progress has been made, there is still room for improvement. BSP needs to match Kina’s commitment to exclude any financing of commercial logging operations in primary tropical moist forests or old-growth forests. Both BSP and Kina also need to extend their policies to prevent them from providing other banking services to the logging industry, including transaction accounts, bank guarantees or performance bonds and foreign exchange.

Act Now! and Jubilee Australia will continue to monitor financial links to PNG’s tropical forest logging industry and encourage all financial sector actors in PNG to develop and implement strong policies preventing any provision of financing, guarantees, transactional accounts or other products and services to the industry.