Putting the squeeze on paper mills in Uruguay
Residents and businesses in Gualeguaychú have concerns over the environmental effects of two new paper mills.
By Oliver Balch, Fortune Magazine

(Fortune Magazine) -- Business at Gualeguaychú's Amalfi Hotel is always slow this time of year. Usually owner Fernando Benedetti doesn't let it worry him. Come summer, he knows the tourists will flock back to this Argentine holiday town. But one look across the sluggish Uruguay River is enough to convince him everything might soon change: Two huge paper-pulp mills are under construction. "If these mills go ahead, it'll be the end of us," Benedetti says. "Who wants to sit on a beach and have two gigantic mills to look at?"

Benedetti's concerns are shared by most of Gualeguaychú's 80,000 residents. They say the chlorine technology that will be used in the bleaching processes will result in toxic effluent and noxious gases. Those, they fear, will pollute the river and contaminate the atmosphere, not to mention the local tourism industry.

Spanish timber giant Ence and Finland's Botnia, the two companies behind the mills, insist such fears are groundless. Both say the plants will meet European standards, as well as those of environmental regulators in Uruguay. "The levels of the environmental permit are very strict," says Botnia spokeswoman Annikki Rintala. "There is no need to be afraid. We have lived in Europe with pulp mills for a very long time."

But months of protests have turned the disagreement into a major international dispute. Uruguay has refused Argentina's demand to halt construction, a position supported in July by the World Court of Justice. Argentine President Néstor Kirchner responded by saying the fight over the mills "is just beginning." To enforce his point, he named Romina Picolotti, a human rights activist and an opponent of the mills, to the new post of Environment Secretary.

Now the banking industry is being pulled into the fray. Ence and Botnia are both looking to international debt markets to help fund the mills, which are expected to cost about $600 million and $1.2 billion, respectively. In what is becoming an increasingly common tactic, opponents are targeting lenders. The strategy is not without its successes. After sustained public pressure, Dutch bank ING (Charts) announced in April that it would not continue in its advisory role for Botnia. ING wouldn't explain its reasoning, but a spokesman insists the decision had nothing to do with environmental issues. All the same, ING's backtracking has inspired environmental groups to target Spanish bank BBVA and French bank Calyon.

The groups have a powerful hook on which to hang their complaints. Both BBVA and Calyon are members of the Equator Principles, a banking-industry initiative launched in 2003 in which participating institutions agree to apply social and environmental safeguards to their lending activities. Now the pulp-mill dispute is being touted as a test case for the principles. Environmental groups complain that the voluntary initiative, which covers more than 85% of the world's cross-border projects, lacks bite. The banks beg to differ. Both BBVA and Calyon say that while they haven't yet decided whether to help finance the mills, their decision will depend largely on the results of an environmental-impact assessment by the International Finance Corp., the private-sector lending arm of the World Bank. A finding is expected by late September.

"By signing the Equator Principles, banks are drawing a line about who they are, as well as making it clear to clients what they need to do to get their money," says Patricia Miller, principal environmental specialist at the IFC. Miller says the principles, revised in July, contain stringent conditions for approving high-risk projects such as the pulp mills. Banks, for example, would have to guarantee that mitigation plans were in place to protect the health and safety of the local community.

The fact that international banks are asking questions about the environment marks a shift in the industry. In addition to the Equator Principles, some banks are developing their own policies and practices. Goldman Sachs is the latest to get in on the act. Earlier this year it joined Citigroup and Bank of America in launching a companywide environmental policy.

Despite these initiatives, environmental due diligence remains an inexact science. "We have seen projects over the last three years where we have said no or we have said yes, and other banks have disagreed," says André Abadie, an environmental-risk specialist at ABN Amro, a Dutch bank. But the Equator Principles give banks more influence. In the past there were only two options when a potential environmental problem was identified: withhold financing or persuade clients to change their plans. Now banks can tie environmental obligations into their loan contracts.

Ultimately, banks are in the business of managing risk, and environmental disasters are risky affairs. Bankers may not buy into saving the planet, but they understand protecting their money. Or so the citizens of Gualeguaychú hope.  Top of page