The report by the Indonesian-based Center for International Forestry Research (CIFOR) said that false assumptions about the origins and cost of wood used in emerging-market mills has led investors to channel billions of dollars into financially risky and environmentally destructive ventures.
The report, funded by the European Commission and the United Kingdom's Department for International Development, analysed 67 pulp mill projects.
A lack of due diligence may lead to "a new wave of ill-advised projects, setting up investors, forest-dependent communities and the environment for a precipitous fall," a statement accompanying the report warned.
More than 40 billion dollars has been poured into pulp mill projects over the last decade, with another 54 billion dollars expected to be invested by 2015, the report said.
It said much of the investment was in Brazil, China, Indonesia, Uruguay and the Baltic States, with low wood costs the major factor driving expansion.
"Financial institutions have shown a surprising lack of interest in understanding how the pulp companies requesting loans are going to get all this cheap wood," David Kaimowitz, director general of CIFOR, said in the statement.
"In reality, some of these mills have vastly overestimated what's legally available from timber plantations. So the only way they can meet production targets is through unsustainable logging of natural forests or by shipping in wood from distant sources at a much higher cost."
The CIFOR report said that when the required wood cannot be sourced from plantation forests, illegal logging and the clearing of natural forests occurs instead.
It also said financial institutions often conduct only minimal due diligence to assess the sources of wood for pulp projects and frequently rely on data provided by the pulp producers themselves.
"The study concludes that pulp mill projects often carry significantly higher degrees of financial risk than investors realise," the statement said.
CIFOR in particular singled out two Indonesian-based companies, Asia Pulp and Paper (APP) and Asia Pacific Resources International Ltd (APRIL), saying that financial institutions had failed to conduct proper due diligence.
Christopher Barr, CIFOR senior scientist and coordinator of the study, said the companies borrowed more than 15 billion dollars in the 1990s after telling investors they had sustainable supplies of low-cost wood.
"However, both companies continue to rely on the clearing of natural forests in Sumatra for 60-70 percent of their wood supply, and each is still years away from meeting its own plantation development targets," he said.
APRIL denied the report.
"CIFOR's statement is extremely misleading and is based on inaccurate data. There is absolutely nothing risky about APRIL's operations," said president A.J. Devanesan in a statement.
He said the company was "a fully sustainable operation" with sufficient acacia plantations and more planned to meet its requirements.
"Each year, APRIL plants around 110 million trees. This provides an ongoing source of renewable fiber from which pulp and paper is made."
Original Press Release and the Report by CIFOR: Press Release: Investors Risk Losing Billions by Misjudging Costs, Environmental Impact of Emerging-Market Pulp Projects. | English version | Bahasa version | Report: Financing Pulp Mills: An Appraisal of Risk Assessment and Safeguard Procedures. |English version|