Auditors bankroll questionable timber practices

 

Time and time again, we come across so-called professionals within the ESG ecosystem whose unprofessional practices cause tremendous harm to the investment community. Sadly, such unprofessionalism and unethical behaviour simply gives the ESG non-believers more ammunition to attack those of us who are pushing hard to achieve more responsible business practices.

Auditors and their consultant arms are among those who have happily jumped on the ESG bandwagon, be it as advisors charging fees to write a sustainability report, or as in an example that we have recently seen, to sign off on erroneous reports that falsely certify timber products as being compliant to environmental and human rights standards. These practices clearly mislead both shareholders and communities.

The statistics of such questionable practices in the timber industry are depressing. According to the International Consortium of Investigative Journalists (ICIJ), companies in over 50 countries have environmental violation data and court filings, with 48 auditing firms declaring these companies as having sustainable practices, even though the companies have been charged with logging in indigenous forestland and protected reserves, using false permits, as well as importing illegally harvested timber.

ICIJ also notes that environmental auditing is largely unregulated, as the auditors, who are part of this USD10 billion industry, are rarely held accountable for downplaying or missing red flags in clients’ operations and sustainability reports.

In a series of articles resulting from Deforestation Inc., a cross-border investigation led by ICIJ, the consortium writes that environmental auditing differs from its highly regulated counterpart, traditional financial auditing, and is governed by far fewer rules and guidelines.

The practices of companies linked to deforestation – and their auditing companies – are major contributors to the global climate crisis. Forest destruction exacerbates flooding and loss of wildlife habitat, and contributes to a surge in infectious diseases. According to some scientific reports, the loss of trees results in some pathogen-carrying bugs migrating to plants that are consumed by farm animals, and these eventually end up in the food chain.

As Governments vow to halt and reverse forest loss and land degradation by 2030 as part of their commitments to COP27 and the UN Sustainable Development Goals, they have also approved stricter regulations which have resulted in the renewed forest protection movement. This has been seen as a business opportunity for auditors to promote their services in helping clients to combat forest loss worldwide.

The Jaringan Pemantau Independen Kehutanan (Independent Forest Monitoring Network, JPIK) told ICIJ it had found that ‘the auditors’ laissez-faire approach made it possible for Indonesian companies to use certification to obtain export licenses for Europe and other markets where buyers were less likely to be aware of the violations“. According to one of JPIK’s researchers, even when violators are punished, the penalties cannot compensate for the destruction of primary forests, wildlife habitats and indigenous peoples’ lands.

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In their Deforestation Inc. investigation, ICIJ reported that in 2021, a provincial court in north-eastern British Columbia suspended the approval of new logging permits, finding that the provincial governments had promoted “intensive use” by forestry companies and other industries that left the area “drastically altered”.

Interestingly, a global accounting firm has served as both the environmental auditor as well as the financial auditor for a forestry conglomerate with USD6 billion in annual revenue. Year after year, the global accounting firm signed “assurance reports” for the projects that were described as “minor non-compliances”, which included instances of logging in protected areas, destruction of wildlife habitat and degradation of water quality.

The court concluded that the “cumulative effects of industrial logging – along with the government’s failure to check an unrelated proliferation of oil and gas wells in the area – led to a “death by a thousand cuts”. The same audit giant counts among its clients at least seven forestry companies that have been accused of deforestation and illegal logging in Indonesia, Papua New Guinea, Malaysia, Cambodia, and other countries.

Closer to our region, this same auditor had provided “assurance reports” finding no major issues in an Indonesian company’s forest management, citing only a lack of information about its suppliers. Yet, in 2020, a group of environmental watchdogs and forestry specialists analysed the satellite images and concluded that this Indonesian company had cleared a protected forest.

The certification of a controversial forestry product in highly regulated Europe has also raised eyebrows. Myanmar teak (The King of Teak) is known as a very expensive teak which is highly sought after in the very high-end luxury yacht market. This teak is not only beautiful but also very resistant to salt water as well as the strong sun.

There are multiple problems with buying Myanmar teak – one is that Myanmar is known to be one of the most deforested countries in Asia and the country has sacrificed their naturally-grown teak for the super yacht industry. Another problem linked to the Myanmar teak market is fraud issues, as the laws on timber regulation require all timber traders to document the legal origin of the timber they trade.

Around 2019, there was a public outcry surrounding a famous naval vessel, as literally tons of Myanmar teak had found its way to be used in the main renovation of the ship’s deck. Due to public pressure, the US and European Union governments declared that they would take tough action against any trader that imported Myanmar teak. The situation has become worse since the military coup in Myanmar, as there are now EU-imposed sanctions against the Myanmar Timber Enterprise, which is a state-owned timber monopoly, following concerns that the earnings from the teak trade and the timber trade are funding the military junta.

And where are the auditing companies in the widely condemned Myanmar teak trade? The ICIJ’s Deforestation Inc. probe has shown that environmental auditors and certification firms were, in fact, responsible for approving products linked to deforestation, logging activities in conflict zones and other abuses to enter markets all over the world.

Investigations like the ICIJ’s have raised questions about whether voluntary environmental certification is effective, considering that the certification organisations rely on third-party auditing firms in a highly-flawed process.

As we look at this picture of dubious practices in the timber industry, it is increasingly clear that environmental auditors need to step up to play a bigger and more responsible role in safeguarding against environmental destruction. As it stands, their “assurance reports” are, at best, funding agencies that you may not want to support, and at worst, fuelling human rights abuses and global climate change. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.