Celulosa Arauco y Constitución S.A.

Sustainability Lab Team Project

Final Report

Tatiana Mendoza, George Miller, Ari Roche, & Ken Young

MIT Sloan School of Management

15.915 Sustainability Lab

Spring 2013

Sponsor Company: Celulosa Arauco y Constitución S.A.

Project Document: Final Report Draft

T. Mendoza, G. Miller, A. Roche, & K. Young

May 15, 2013

Introduction

Executive Summary

Today, human activity causes continued concern over rising global temperatures. Evidence

suggests burning fossil fuels to produce energy, and deforesting the planet’s natural means of

removing carbon and other greenhouse gases (GHGs) as significant contributors to the climate’s

change. Celulosa Arauco y Constitución S.A. (Arauco), one of the world’s largest forestry

companies shares in the growing concern around climate change and aspires to be a lead

combatant to mitigate further change. This paper outlines a recommended agenda of nine (9)

principles for Arauco to become a leader in forestry against climate change. These

recommendations draw inspiration from best-in-class companies in other industries, current and

emerging trends within forestry and among Arauco’s competitors, Arauco’s own initiatives and

from their influential stakeholders.

Company Background

Formed in 1979, Arauco is headquartered in Santiago, Chile, and has positioned itself as one of

Latin America’s largest forest owners with total land holding of around 1.5 billion hectares.

Arauco’s business interests cover much of South America, including strong presence in Chile,

Argentina, Brazil and Uruguay, but in recent years have expanded to North America, Europe and

Asia. Arauco has five primary businesses, including forest management, wood pulp, sawn

timber, panels, and energy (see Exhibit 1). Each core business operates with largely different

customers and different needs. In their 2011 annual report, Arauco reported revenue of $2.0B

from wood pulp, $1.2B from panels, and the remaining $0.7B from timber.

Industry Background

Recent estimates value the timber and forest products industry at $450 billion1. The industry is

characterized by companies of varying sizes and capabilities ranging from upstream forest

management activities to downstream distribution of wood and other paper products. The

upstream access to forestland is a highly complex issue with companies gaining access by wholly

owning, leasing or licensing forestlands. Many companies employ a combination of strategies to

gain the necessary raw materials to develop a host of downstream products including timber,

panels and boards, wood pulp and various wood byproducts, and biomass. A short description of

each of these products is below.

1 Hoovers industry in-depth (Timber)

Timber

Timber products are typically classified as the sawn lumber necessary for use in the

construction of wood structures. This includes consumer items such as furniture and

residential housing. The real estate construction business is the largest consumer of

timber products, accounting for approximately 60% of all consumption in the US, with

residential construction and remodeling comprising approximately 75% of this share2.

Panels and boards

Wood panels are constructed by interlocking various woods together, most often using

wood fibers. Medium Density Fiberboards (MDF) and plywood are the most common

panel forms, which are constructed by binding hard and softwood layers (plywood)

and/or wood fibers (fiberboard) together using waxes and resins. Common uses for these

products include packaging, building insulation, and interior decoration.

Wood pulp

Wood pulp is produced through a process where natural cellulose fibers are separated

from the wood. These wood fibers are then re-manufactured into many products

including paper, textiles, newsprint, and paperboard.

Biomass

Biomass is an emerging product category for foresters. This general product describes

the using organic materials to generate energy through electricity, oil and other

byproducts. Biomass such as ash, unusable trees (smaller in diameter), and stems were

traditionally landfilled or burned through controlled means, but can now be used as raw

materials for biomass. Many timber companies cogenerate electricity for use in the

operation of pulp mills, factories, and other industrial processes.

The Industry and Climate Change

Effects on Climate Change

The Intergovernmental Panel on Climate Change (IPCC) has estimated that 17% of global

carbon emissions are a result of forestry and deforestation activities. The forestry industry’s

carbon emissions present a significant challenge and tremendous opportunity for organizations

throughout the forestry value chain. As mentioned previously, however, the environmental

challenges stretch beyond purely carbon and other greenhouse gas emissions. Utilizing a basic

stock-and-flow systems framework to demonstrate the interactions between human growth,

carrying capacity and technology, such as the one developed by John Sterman for “Sustaining

Sustainability,”3 we identified the critical areas where forestry contributes the most to negative

climate change. This allows us to focus the strategy on the most impactful issues and thus,

2 Hoovers industry in-depth

3 “Sustaining Sustainability: Creating a Systems Science in a Fragmented Academy and Polarized World”

by John D. Sterman 2012

Arauco’s climate change mitigation strategy must include components that are directly

addressing these three key challenges created by their business-as-usual forestry operations:

1. Deforestation and Land Degradation

2. Intensity of Operations

3. Biodiversity

Arauco and Climate Change

Current Climate Change Initiatives

Acknowledging the impact of their activities, Arauco has initiated a number of programs and

efforts to mitigate their contributions to climate change. The following are a selection of

highlights and will be launching points for further action outlined in the recommendations.

Mission Statement

Arauco has incorporated sustainability within their mission statement and strives to be a

global leader in the development of sustainable forest products. However, it is difficult to

understand if this mission statement speaks or has been incorporated into all of their

business units.

Certification

In 2009, Arauco sought FSC Forest Management certification for their Chilean

operations. As a result, Arauco adopted a solutions-focused consultation process called

the Hybrid Forum Model. The Hybrid Forum Model helped Arauco identify and address

concerns from Woodmark (i.e. commitment of company and identifying decision

makers), the FSC’s accredited certification body, which identified 82 areas within

Arauco’s forest management practices requiring improvement prior to undergoing full

certification assessment4

. In addition to their FSC certification, Arauco has

approximately 1.8 million acres of forest certified in compliance with CERTFOR, Chile’s

national standard for sustainable forest management.

Carbon Footprint

In 2008, Arauco conducted a comprehensive assessment of their carbon footprint. The

Carbon Footprint Assessment (CFA) served as a benchmarking tool for Arauco to set

goals against and could inform their efforts to reduce the company’s carbon intensity.

Arauco contracted a third party, AECOM Environment, to develop the CFA. The CFA

accounted for direct GHG emission sources owned or controlled by the company, GHG

emissions that occurred at other indirect sources, and the CO2 that is stored during the life

of their products5.

Santiago Climate Exchange

In 2011, Arauco partnered with nine other companies to launch the first climate exchange

in Chile, the Santiago Climate Exchange (SCX). SCX’s mission is to create and develop

“green markets” for the reduction of greenhouses gases (GHG) in Chile and Latin

America. Using methodologies endorsed by the world’s biggest markets, SCX promotes

the creation of green projects and enforces a technical professional framework required

for the reduction of GHG in a valid and cost effective manner6.

Defining Leadership

In this section, we define six (6) characteristics of sustainability leaders and utilize case studies

to uncover their factors of success in driving industry change. The lessons from these case

studies inform and shape the recommendations for Arauco.

Attributes of Leader #1 - Commitments to Improve through Metrics and Measurement

Case Study: Anheuser Busch InBev

Identifying and measuring the key metrics is a difficult but fundamental first step in achieving

progress in any business pursuit, but it is specifically critical when pursuing a complex objective

such as sustainability. Thus, a key leadership characteristic is establishing tangible and

achievable goals. Key Performance Indicators (KPI) serve as a critical yardstick to benchmark

and measure a company’s environmental performance.

4 Arauco, Annual Report 2010

5 SCX Climate Exchange initiative, www.scx.cl/en/scx/

6 United Nations - Climate Action

Brewing beer is intensive in its water and energy use, Anheuser Busch demonstrated leadership

in establishing and achieving substantial goals, creating a more sustainable production process7.

To begin, Anheuser Busch addressed the needs of their key stakeholders, speaking with both

downstream customers as well as distributors. With clear focus on water and energy efficiency,

recycling, and overall carbon emissions, Anheuser Busch set baselines in coordination with their

merger with InBev at 2009. Using these benchmarks they set three year goals to improve on each

of these areas. This experience demonstrates leadership as AB InBev committed to these goals,

despite not being fully aware of how they would achieve them. Having these stretch goals

fostered the necessary innovations resulting in AB InBev achieving each one of their targets.

Attributes of Leader #2 - Collaboration Across Industry

Case Study: Patagonia

The sustainability achievements by any company acting alone pale in comparison to making

fundamental shifts in the industry. Economic traps, such as the tragedy of the commons and the

free rider problem, almost always cause sustainably minded companies to be plagued by

unbearable cost competition as well as loss of motivation. To make lasting and meaningful

change toward sustainability, collaboration between players is essential for reasons including

shared and universal metrics, policy advocacy, best practice sharing, and economies of scale.

In 2009, Patagonia partnered with Wal-Mart to create the Sustainable Apparel Coalition (SAC)

that pioneered a new standardized index for measuring the environmental footprint of apparel

and footwear. In just two years the "Higg" index is now used by over 50 global brands and 250

manufacturers8. Key factors in its success are attributed to a strong network of support, positive

predecessor contribution, and a focus on supporting operational improvement.

In developing the Higg Index, the SAC focused three key factors. The first key was to partner

with the most influential players who were committed to long term sustainability in the industry.

Second SAC highlighted the need to be efficient and practical in their progress, building on other

tools and identifying the initial high impact areas with a focus on continuous improvement.

Lastly, SAC sought on collaborative leadership from pioneers, pacing a path for larger and more

challenged companies9.

Moreover, SAC built a wide network of support including business leaders such as Wal-Mart,

government leaders such as the Environmental Protection Agency, and a strong community of

non-profit entities. With this multilateral support they were able to gain credibility at an

outstanding rate.

7 “Anheuser Busch InBev Achieves Global Three-Year Environmental Targets,” The Wall Street Journal

Market Watch, 5 March 2013. 8 “Clothes Makers Join to Set ‘Green Score,” The New York Times, 1 March 2011.

9 C. Kester, D. Ledyard, K. McElhaney. “The Sustainable Apparel Coalition: A Case Study of a

Successful Industry Collaboration,” June 2012.

The SAC built the index upon existing efforts including the Nike Apparel Environmental Design

Tool and the Eco Index, developed by the Outdoor Industry Association, the European Outdoor

Group and the Zero Waste Alliance10

. These two metrics had value, but had not achieved the full

life cycle perspective that the Higg Index intended to demonstrate. By using these tools as a

launching pad, SAC was able to take advantage of their progress and begin development beyond

traditional starting points.

Lastly, the Higg Index promotes internal improvement rather than external humiliation. The tool

highlights the lessons that pioneering companies have learned to help industry players

understand how they may improve their operations.

There are three key lessons to be drawn from the SAC experience. First, industry leaders must be

engaged to establish a respectable base with high potential impact. Second, pragmatic metrics,

often built upon the work of first-movers and other to gain early momentum and continued

improvement. Lastly, a collaborative environment helps engage business across the sustainability

spectrum and bring the whole industry forward at an accelerated pace.

Attributes of Leader #3 - Advocacy for Policy Change

Case Study: Maersk Lines

Government policy is often critical for progressing an industry’s sustainability. Influential

market players can hold significant leverage in shaping policy toward environmental

improvement. Maersk Lines, a global leader in the shipping industry, demonstrated this

capacity. Representing 12-15% of all global container trade, Maersk emerged as a leader in

sustainability due to two pioneering efforts, slow steaming and upgrading their fuel. Slow

steaming, whereby ships move at a slower pace on certain portions of their journey, provided

both economic and environmental benefits. Maersk became so successful overcoming the

logistics challenges that this practice has become a norm in the industry. However to solve their

fuel challenges, Maersk would need help.

The industry had historically utilized what they called “bunker fuel,” which contained high levels

of acidification gases such as sulfur and nitrogen. The emissions from these fuels left

contaminants in the harbors, often causing health problems for the local populations. In 2010,

Maersk decided to switch to a less harmful, but more costly fuel and selected six harbors in

which to changeover their fuel. In making this change Maersk incurred an additional $1M in

costs annually. As Maersk played such a significant role in many of these harbors they

collaborated with local government to enact policies that helped divert the cost of fuel upgrade

and thus creating the economic conditions for others to follow suit11

.

10

Clark, Evan. "Sustainable Apparel Coalition Formed", Women's Wear Daily, 1 March 2011. 11

F. Reinhardt, R. Casadesus-Masanell, F. Nellemann. “Maersk Line and the Future of Container

Shipping”, Harvard Business School.

The work of Maersk demonstrates that local market power can provide the basis for companies

to pioneer unique and previously unapproachable goals. By influencing legislation they created

market conditions for the entire industry in those areas to act more sustainably.

Attributes of Leader #4 - Transparency Throughout Operations

Case Study: New Britain Palm Oil

Sustainability leaders set examples of transparency in their operations. This allows them to

embrace opportunities to improve and creates models for the industry to follow. Furthermore,

leading organizations can better engage customers and provide them the information needed to

make informed decisions.

Clearly measuring the impact of business operations is often not easy. In the palm oil industry,

New Britain Palm Oil Limited (NBPOL) faced extensive challenges in identifying the paths of

their palm supply. Traditional palm oil farming requires especially vibrant soil, often found in

precious rainforest lands. Consumer pressure about the clearing of these forestlands for palm oil

production forced producers to demonstrate more sustainable practices. The challenge for

NBPOL was that they couldn’t effectively trace the source of the palm oil fruit in their in the

supply chain because large refineries mixed many sources of palm oil together, making it near

impossible to determine their origin. To overcome this challenge NBPOL established their own

refinery and focused on acquiring more sustainable sources to supply their refinery. Having their

own refinery allowed them to better track and control the sources of their palm oil and NBPOL

implemented the Roundtable of Sustainable Palm Oil (RSPO) eTrace system to track and publish

their results. This opened them up to third party certification and led to implementing the

ISO14001 EMS standard to link these indicators to an effective management system. NBPOL

developed new proxies for land degradation such as fertilizer usage and pesticide application.

They also chartered longer term studies to better understand both soil quantity and quality, using

parameters such as exchange capacity, organic matter levels, and nutrient concentration12

.

These metrics are often challenging to define and measure, but are critical to developing insight

on one’s operation. NBPOL established more cost effective methods to trace their supply chain

and overcome these challenges. In addition, NBPOL utilized a third party to certify and

substantiate these new methods providing the much needed legitimacy for their acceptance.

Attributes of Leader #5 - Innovation and Thought Leadership

Case Study: Monsanto

Technological progress is critical for improving sustainability, as highlighted in the stock-and-

flow systems framework introduced earlier in the paper. Furthermore, innovation is often

12

New Britain Palm Oil Limited, www.sustainablepalmoil.org/growers-millers/millers/case-studies/new-

britain-palm-oil-limited/

spurred through deliberate investment of time and resources in research and development

capacity. The most successful industry leaders diversify their efforts by engaging in R&D via

many different channels, both internally and through external partnerships.

Monsanto, one of the world’s largest producers of food, invests heavily in R&D to overcome

specific business challenges by spending approximately $1.51B annually in research and

development13

on topics including seed development, pesticide and weed protection, and farm

management practices14

.

With a strong market presence, Monsanto engages experts in technical fields to tap knowledge

from many sources. For example, by working with Sandia National Laboratories, Monsanto is

able to benefit from the sophisticated laboratory technologies to better study biological functions

with breakthrough methods and technology. For Sandia, this provides industrial knowledge and

the opportunity to apply their research outside of the laboratory, creating a win-win partnership

between them.

This partnership specifically has helped Monsanto researchers to study how the changes they

make can affect the breeding process for substances such as corn. In a project with the U.S.

Department of Energy, Monsanto has been developing corn breeds to provide ethanol.

Understanding the fundamental cell changes in the plant helped Monsanto to identify why some

strains were able to achieve 4% ethanol yield while others merely achieved 2%15

.

Attributes of Leader #6 - Employee and Company Cultural Engagement

Case Study: Microsoft

To create lasting change in large organizations, attitudes, mindsets and company culture must

support these changes. This holds utmost importance for change including sustainability.

Microsoft has taken a multi-pronged approach to embed this core value and mission of more

sustainable business into their culture. Despite its unpopularity and unfamiliarity at the time,

Microsoft was one of the first companies to institute recycling bins in the office, posting visual

messages and reminders about the practice. They implemented a progressive bus policy to

incent mass transit and remove approximately 25,000 miles of car traffic off the road each day.

More recently, Microsoft implemented a “carbon budget” as a logical next step to their carbon

footprinting effort. This budget works similar to financial budgets in that each project and

department is required to meet specific targets. This enables Microsoft to progressively tighten

the amount of carbon in their overall budget and incorporate this into product design, supply,

marketing, distribution and other decisions as part of the common language and critical targets16

.

13

G. Stohr. “Monsanto Wins Seed Case as High Court Backs Patent Rights,” Bloomberg, 13 May 2013. 14

Monsanto Key Agricultural Innovation, www.monsanto.com/improvingagriculture/Pages/our-role.aspx 15

“Sandia and Monsanto form research partnership,” San Francisco Business Times, 9 August 2006. 16

L. Kaye. “Microsoft Commits to Carbon Neutrality,” Triple Pundit, 9 May 2012.

This sends a clear message to employees about the importance of the carbon intensity of their

company and its products, and facilitates dialogue and new ideas around sustainability within the

company at all levels.

Arauco’s Customers

The needs and concerns of Arauco’s customers should be reflected in their climate change

strategy and actions. A comprehensive study of these stakeholders can uncover critical

environmental and sustainability themes. Arauco has requested the authoring project team to not

engage with their customers at this time, and as a result, the following section represents only a

high-level assessment of these important stakeholders.

With customers in 75 countries, Arauco is a leading global supplier of third-party certified,

sustainable panels, mouldings, solid wood products, and pulp17

. Their customers segments are

diverse and range from producers of household wood fiber based products, such as toilet paper,

specialty paper, and packaging, to businesses creating furniture and selling remanufactured

timber products, and to those in construction and industrial sectors, which includes the use of

panels and lumber18

19

20

21

22

. Wood pulp customers remain the most influential with

approximately 50% of annual revenue23

.

As it relates to climate change, wood pulp customers are primarily concerned with ensuring their

suppliers are certified to Forest Stewardship Council (FSC), the Programme for the Endorsement

of Forest Certification (PEFC) and the Sustainable Forestry Initiative (SFI) in North America

and communicate their goals and progress through publically available sustainability reports24

.

Arauco plays a large role in their customer’s ability to achieve their sustainability goals. For

example, in 2005, Sappi Limited, a global company, and customer of Arauco, focused on

providing dissolving wood pulp, paper pulp, and paper based solutions25

, established one of the

first sustainability charters in the paper industry26

. They adopted a science-based sustainability

platform and publicly established goals, such as reducing emissions from fossil fuels by 40%

across all sites and increasing the level of third party chain of custody (COC) fiber to an average

17

EBuild Manufacturer Details, www.ebuild.com/manufacturer-detail/9696.hwx 18

Smurfit Kappa Company, www.smurfitkappa.com/vhome/com/AboutUs/Pages/Default.aspx 19

Felix Schoeller Company, www.felix-schoeller.com/de_de/unternehmen/profil/daten-fakten.html 20

SCA Business and Operations, www.sca.com/en/About_SCA/SCAs-business-and-operations-

worldwide/SCA-Forest-Products-at-a-glance/ 21

SCG Company, www.scg.co.th/en/ir/home.html 22

Mitsubishi Paper Company, www.mitsubishi-paper.com/en/aboutus_start.html 23

Arauco 2011 annual report 24

Xerox Sustainability Report,

www.xerox.com/downloads/usa/en/s/sustainabilityRef_XE_sngl__rev_LR.pdf 25

Sappi Group, www.sappi.com/regions/sa/group/GroupProfile/Pages/default.aspx 26

Sappi North America, Sustainable Certification, www.na.sappi.com/sustainable-fsc-certified-paper

of 60% across all sites27

. Additionally, they triple certified their North American mills to FSC,

PEFC and SFI standards. These actions enabled Sappi to achieve the lowest reported greenhouse

gas emissions amongst the major North American coated freesheet suppliers28

. Similarly, Crown

Van Gelder N.V. (CVG), another influential customer of Arauco, is also focused on their

sustainability efforts, specifically climate change and energy29

. One of CVG’s objectives is to

reduce their energy consumption by 50% by the year 2020, from the base year 200530

. Through

sustainable practices and publicly communicated measurements, Arauco can assist their

customers in achieving their sustainability goals.

Furthermore, timber and panels customers are also focused on taking action to reduce

deforestation and forest degradation31

. These companies, such as home improvement warehouse

stores, furniture suppliers, as well as businesses in the construction and remodeling industries,

are taking the steps to meet the certification and legislative standards32

. Certifications appear to

be the most important to this segment. These examples and others provide strong evidence that

Arauco’s current and future ability to acquire and keep customers depend on their own ability to

demonstrate environmental stewardship against climate change.

Arauco’s Competition

Recommendations for Arauco must be framed against the current backdrop of the industry,

including their competitors. In order to develop an understanding for the current state of climate

change efforts in the industry, a selection of competitors, chosen in collaboration with Arauco

including Canfor, Fibria Celulose, UPM, Stora Enso, CMPC, and Domtar, were researched and

assessed. Competition within the industry remains very high with a few multinational players

with the size and scale of Arauco. Many foresters are regionally focused in their supply of

timber and other raw materials, with downstream distribution arms reaching many countries

throughout the world. The rise of electronic media in the past 10-15 years has resulted in some

amount of industry stagnation and even contraction in some areas, especially in wood pulp. This

contraction, however, has been countered with the tremendous growth in the demand from

developing and emerging markets such as China, India, Southeast Asia, and Latin America33

.

27

Sappi North America, Sustainability Commitments,

www.na.sappi.com/sustainability/commitment/goals 28

Sappi North America, Sustainable Certification, www.na.sappi.com/sustainable-fsc-certified-paper 29

CVG Climate and Energy Initiative,

www.cvg.nl/index.php?option=com_content&view=article&id=98&Itemid=553&lang=nl 30

CVG Forestry Certification,

www.cvg.nl/index.php?option=com_content&view=article&id=98&Itemid=553&lang=nl 31

National Association of State Foresters. “Forest Certification as it Contributes to Sustainable Forestry,”

1 October 2008. 32

SCG Building Materials, “Carbon Label,”

www.scg.co.th/th/08news_release/01_news/detail.php?ContentId=2063 33

Hoovers industry in-depth (Timber)

Company Location Size

($M

Rev)

Own

Forests?

Wood

pulp

Timber Panels

&

Boards

Biomass Paper &

Wood

Products

Arauco Chile 4.37 X X X X X

Canfor Canada 2.72 X X X

Fibria

Celulose

Brazil 3.01 X X X X

UPM Finland 13.79 X X X X X X

Stora Enso Finland 14.58 X X X X X

CMPC Chile 4.80 X X X X X

Domtar Canada 5.48 X X

Fibria Celulose and UPM report the most comprehensive results and aggressive climate change

goals of the companies studied. These companies receive this distinction for a number of

reasons. First, both companies acknowledge and report on the three critical challenges posed by

forestry operations, namely the intensity of operations, loss of biodiversity and deforestation and

land degradation. Second, they have developed methodologies to quantitatively measure and

monitor all, or nearly all metrics and key performance indicators (KPI) related to these

challenges. Lastly, their commitment to improving their record is reflected by the ambitious

goals (both long and short term) they established for these measures.

Emerging Climate Change Themes

In order to create an achievable climate change strategy, forestry must be examined through the

lens of firms within the industry. The following analysis utilizes components of a 5-forces

framework (Customers, Suppliers, Competitive Rivalry, Product Substitutes, and Threat of

Entrants) to determine the competitive position of each of firm, and assess each firm’s climate

change strategy around the identified challenges (see The Industry and Climate Change section).

The below highlights relevant implications for components of Arauco’s climate change strategy.

Ubiquity of Sustainability Reports

Foresters are primarily reporting the environmental performance of their business and actions to

mitigate climate change through annual releases of sustainability reports, separate from their

annual 10-k filings. All companies studied, except for UPM, took this approach. UPM

integrates some environmental performance into their annual report to shareholders, however,

the company has invested significant efforts building a robust online ecosystem of sustainability

reporting.

Furthermore, most companies submitted their reporting to the Global Reporting Initiative (GRI),

a non-profit organization that provides the most prevalent sustainability reporting standards.

While reporting followed these standards, they were done to various levels of detail and

compliance, measured through application levels, and to varying degrees of third-party

verification and audit. Submission of reporting to the highest application levels and with third-

party audit of the results signifies a commitment to providing transparency to the public.

As introduced earlier, the significant and increasing interest of customers in the sustainability

record of their forestry suppliers, requires easy to access, comprehensive, and accurate resources

and information about a company’s environmental performance and actions. As a result, this

should be a critical component of a forester’s climate change strategy.

Unclear Strategies

The strategies for combatting climate change across competitors maintain some similarity in

spirit, but vary in strategy. Companies with the most mature strategies, including UPM and

Fibria Celulose, articulated specific missions and aspirations about the role of their organization

in mitigating climate change, while others simply reported the results of their operations. When

a clear mission statement and vision was established, the actions of the company had more

defined linkage to these objectives. This linkage is important to understanding the organizational

commitment and attitudes towards sustainability.

A Mixed Bag of Reuse and Recycling

Given the varying degrees of integration of these companies throughout the value chain, many of

them are combatting climate change through innovations in the design of their products. One

common emphasis is through the creation of products that utilize recycled pulp and other raw

materials. For example, CMPC monitors and measures the total share of their paper produced

using recycled wood fibers (43% in 2011). Companies can take a lifecycle approach to product

design by increasingly assessing all life stages of their products to understand the reusability of

its contents. However, no company implemented programs such as wood take-back to collect

and/or divert landfill destined used wood products.

The Rise of Certification “Gold Standards”

There are over 50 independent forestry certifications that exist throughout the world today34

.

Additionally, various parts of the forestry value chain can be certified creating additional

complexity in interpreting the certification schemes. Despite the range of certification programs

34

“Third Party Forest Certifications in British Columbia,” Naturally: Wood April 2013

only approximately 10% of the world’s forests are certified under any program35

. Generally, the

two areas of focus for certification are the management of forests and the chain-of-custody

(COC) for manufacturers, processors and others throughout the value chain including pulp mills

and panel processing facilities.

Two certifications have risen as the most important and popular standard in reporting certified

wood. Unsurprisingly these are FSC and PEFC given their importance to customers as identified

in the above customer section. Many companies benchmark, measure and set goals against the

percentage of their forests and operations certified to these standards. For example, UPM sets

targets of 100% of their operations certified chain-of-custody to the FSC standard by 202036

. As

a result of the popularity and emphasis on these certifications, understanding the programs and

becoming a voice in their future evolution will be important to maintaining climate change

leadership and furthering the progress of mitigation actions across the industry.

Supplier Transparency

Many of Arauco’s competitors purchase wood pulp, timber and other raw wood materials from

other sources to supplement their own production. The PEFC and Forest Trends37

report that

approximately 14-20% of world’s forests are privately owned, and many companies access them

through purchase of their timber, licensing of their forestlands, or both. There is an increasing

emphasis on understanding the management and operational practices of suppliers, especially for

the highly integrated, consumer-facing companies. Efforts to identify the source of supplied

wood, and the methods used to procure them improve the transparency of each company, and is

becoming increasing popular to account for this in the carbon footprint of their products. As

companies depend on increasingly complex systems of supply, maintaining proper tracing of

these materials will be important to ensure compliance with many standard sustainability

measures.

Focus on Improving Operations

The most common actions within the industry for combatting climate change are those that

reduce the impact and intensity of operations. As a result, the industry has developed and

adopted very comprehensive measures extending across many challenges in this category

including the emission of carbon and other greenhouse gases, the release of effluents

contributing to the acidification of the atmosphere, the consumption amounts and mix of energy,

the use of water, and the creation of non-useful waste. Additionally, for all companies studied,

the measure of their carbon footprint was an annual practice conducted internally or through

independent organizations. For many companies this represented the entirety of their scope of

action on climate change and therefore was the most common and mature area of focus. This

35

Sustainable Forestry Initiative (SFI) 36

Forest Stewardship Council (FSC) 37

Programme for the Endorsement of Forest Certification (PEFC)

frequency and activity should be incorporated by any forester striving to be minimally aligned

with industry norms.

Achieving Biodiversity Through Land Protection

About half of the companies in the competitive set acknowledged the critical role biodiversity

plays in promoting healthy forest development and mitigating climate change through increasing

the restoration and regeneration rate of the forest’s carrying capacity. The most common

response is to designate forestlands as protected and avoid harvesting any of these lands. For

example, Fibria Celulose set aside 36% of their owned forestlands to preserve biodiversity and

maintain the natural ecological processes. Moreover, they were the only company to actively

measure and set targets on the actual restoration of their forestlands, striving to restore

approximately 40,000 hectares of land by 2025. This relatively limited, but emerging focus

signals that many foresters have a narrow understanding of and/or lack of commitment to

biodiversity issues.

Collaboration and Partnership Among Competitors is Limited

Within-industry collaboration is rarely cited as a source for environmental progress and

stewardship. However, almost all companies partnered with external organizations such as

universities, non-profit organizations, and governments to develop various components of their

plans. The most common partnerships were that with the World Wide Fund for Nature (WWF)

through their New Generation Plantation program that promotes healthy development and best

practices for designing and managing tree plantations, and with the World Business Council for

Sustainable Development (WBCSB) to spur inter-industry action on sustainable business.

Despite these partnerships and memberships, foresters lack a common industry-led and backed

organization to collaborate on climate change via research, policy change, business practice,

joint-ventures and others for shared progress on environmental and other issues38

.

Geographically concentrated groups have emerged such as the Canadian Boreal Forest

Agreement (CBFA) in 2010. This established a coalition of foresters and others who depend on

forests to establish governance around sustainable management of this forestland in Canada39

.

The group now commands over 66% of the certified forestry in Canada and addresses challenges

in forest protection, species protection, and general forest management. As the first forestry

group to require third party certification, the CBFA is a unique and progressive example of

industry collaboration.

Few Link Social and Environmental Aspirations

Most companies incorporate social sustainability as a separate thread in their overall corporate

sustainability programs. However, the emphasis, while undeniably important, remains on labor

relations including employment, wages and working conditions. Few companies extend their 38

“Who Owns the World’s Forests? Forest Tenure and Public Forests in Transition,” Forest Trends 39

R. Aulakh. “Canada boreal forest pact is still alive: Forest Products Association of Canada,” The Star,

19 April 2013.

scope to include community and social engagement on climate change. Issues of community

displacement due to deforestation, acidity of rain due to the release of gases such as sulfur and

nitrogen from forestry practices, and threat of native species and topsoil health, greatly impact

communities within the geographic area of foresters, and are emerging concerns for

environmentally aware forestry customers. Educating communities and customers on these

important issues is critical to creating cohesive linking from social to environmental

sustainability.

Recommended Climate Change Principles

Understanding where Arauco has the greatest ability to impact climate change is critical for a

return on their time and investment. By utilizing the same basic stock-and-flow systems

framework referenced above, (see The Industry and Climate Change section) we ensure our

recommendations address the main challenges outlined above, while pulling the key levers to

impact climate change. The areas critical to Arauco’s strategy are highlighted on the below

diagram and include reducing the delays of technological innovation (1), social concern (2) and

policy change (2), reducing Arauco’s, and their industry’s resource consumption and degradation

(3), improving the regenerative capability of their forest’s carrying capacity (4), improving the

adequacy of resources (5), and voluntarily limiting their growth (6).

As a result of our research, we have developed nine (9) achievable climate change principles for

Arauco to incorporate in their strategy to become a leader in mitigation of climate change. These

recommendations draw upon our understanding and definition of leadership, our analysis of

current emerging trends within forestry and Arauco’s own initiatives. Additionally, we have

ensured our recommendations are in alignment with the values and initiatives of Arauco’s

customers. Our recommendations are as follows:

1 Develop internal pathways for a sustainability mission statement

2 Support the sustainability mission throughout their corporate culture

3 Maintain environmentally concerned corporate governance

4 Become a thought leader

5 Create quantitative measures, benchmarks and goals

6 Conduct annual carbon footprinting

7 Develop a collaborative forestry coalition

8 Engage customers and other key stakeholders in decision-making

9 Explore a recycling program for wood products

Develop internal pathways for a sustainability mission statement

Companies on the forefront of sustainable business personalize the scope and motivation in their

aggressive pursuit of improvement. This mission should captivate Arauco’s employees and

foster tighter partnership and alignment with external stakeholders (investors, regulators,

customers, etc.). As a result this mission should have joint input and ownership throughout the

organization.

● Inspiration for recommendation: Forestry’s “Unclear Strategies”

● Short-term Actions – Elect ambassadors and key representatives from all business units

within Arauco to jointly author a unifying sustainability mission. Once finalized, this

mission should be shared externally through prominent display in applicable sources

(sustainability report, 10-k filings, website, brochures, etc.).

● Long-term Actions – Establish regular intervals at which this mission is critically

reviewed and updated by cross-unit team, as necessary, to reflect changes in the business,

social and other conditions.

Support the sustainability mission throughout their corporate culture

Leading class companies ingrain their sustainability missions throughout their company culture

by inserting components throughout many of their actions. From employee on-boarding and

training, to performance evaluations, Arauco can ensure sustainability has significance

internally.

● Inspiration for recommendation: Microsoft case study

● Short-term Actions: Communicate the above climate change strategy from senior

leadership teams through bulletins (electronic) or in-person via town-hall style meetings.

In unison, launch internal resources to create shared language and understanding among

employees of climate change issues and Arauco’s response. Ensure this training extends

to new hire onboarding.

● Mid-term Actions: Introduce a carbon budgeting program that inserts environmental

measures alongside financial measures to inform project decisions. Continue to tighten

the carbon budget over time to reduce the overall impacts of the company.

● Long-term Actions: Integrate environmental performance into employee performance

evaluations and bonuses, including for corporate officers and executives.

Maintain environmentally concerned corporate governance

Environmental objectives should align with the interests of corporate officers and the board of

directors. Having this shared incentive ensures that at the highest levels of management.

● Inspiration for recommendation: Fibria Celulose

● Short-term Actions – Request and publish commentary from members of the board and

corporate officers regarding the environmental performance of the company and

reporting in sustainability reports.

● Mid-term Actions – Request the review and assessment by independent third-parties

(such as non-profit organizations, government and others), the environmental reporting

and sustainability efforts of the company. Use third-parties to verify environmental

claims and results.

Become a thought leadership

Through its employees, Arauco has the ability to be a thought leader by leveraging in-house

experts to charter studies, author research articles, and publish findings on the latest climate

change topics. These articles could be placed in key publications read by partner companies,

stakeholders and competitors. In addition, Arauco can act as an educator on climate change

issues to elevate the collective dialogue and conversation.

● Inspiration for recommendations: Forestry’s “Few Link Social and Environmental

Aspirations,” “The Rise of Certification ‘Gold Standards’”

● Short-term Actions – Start an online blog or newsletter where in-house experts share

insight on actions to mitigate climate change.

● Mid-term Actions

○ Supplement these resources with an educational platform such as online learning

libraries, curriculum and community or on-site trainings to break traditional

sustainability barriers and develop shared understanding of key issues. This could

include topics such as climate change terminology, overview of key issues,

emerging trends and recent research, certification regimes, etc.

○ Explore international partnerships with research universities and professional

laboratories to strengthen R&D sources.

○ Develop easy to access tools for customers and consumers to understand

certification regimes including side-by-side comparison matrices.

● Long-term Actions – Create long-term partnerships with other organizations (i.e., FSC,

PEFC, Universities, etc.) to co-author and sponsor research for journals, organize

conferences on sustainability in forestry, and consider emerging communication outlets

such as social media platforms to disseminate knowledge.

Create quantitative measures, benchmarks and goals

In order to progress across the variety of climate change dimensions, Arauco should develop a

comprehensive set of environmental performance metrics. Additionally, they should strive to

transition qualitative indications to quantitative measures should be transitioned to quantitative

metrics so the appropriate benchmarks and reports can be created. These metrics and benchmarks

can be used to develop and advertise aspirational goals for the company.

● Inspiration for recommendation: Anheuser Busch InBev metrics and measurement case

study and forestry’s “Achieving Biodiversity Through Land Protection”

● Short-term Actions – Define key performance indicators (KPIs) in new segments

reflecting biodiversity, deforestation and land degradation. Use current metrics for

reported water usage, solid waste, GHG emissions, and acidification gases to set

benchmarks and goals. Publish these measures and goals in sustainability reporting.

● Mid-term Actions – Benchmark newly developed KPIs and set goals for improvement.

Publish these goals in sustainability reporting. In particular, commit to eliminate fossil

fuels from energy portfolio in alignment with leading aspirations in forestry.

● Long-term Actions – Create task forces responsible for developing and enacting plans to

achieve goals. Set target to become a net energy producer using woody biomass and

other cogeneration technologies without the purchase of carbon offsets in alignment with

leading aspirations in forestry.

Conduct annual carbon footprinting

Measuring the carbon footprint of an organization’s operations is becoming commonplace, and is

expected of class leading companies.

● Inspiration for recommendations: Competitive Analysis

● Short-term Actions – Invest the time and resources to measure Arauco’s carbon footprint

at a minimum on an annual basis. Utilize these results for internal carbon budgeting as

recommended above.

● Long-term – Invest in continuous improvement to refine the measurement process to

minimize cost while maximizing its effectiveness and accuracy.

Develop a collaborative forestry coalition

Despite the differences in business culture and geography, similar climate change concerns and

issues are faced by nearly every company within forestry. To date, collaboration among forestry

companies has been limited with most external engagement happening with organizations such

as non-profits, universities and governments. Arauco has an opportunity pool the collective

business, financial and scientific expertise of many to accelerate the overall progress of the

industry.

● Inspiration for recommendations: Patagonia case study and Forestry’s “Collaboration

and Partnership Among Competitors is Limited”

● Short-term Actions – Organize an industry sustainability summit or other convention that

brings together representatives from the major forestry companies to discuss common

challenges and issues.

● Mid-term Actions – Assemble a coalition whose mission is to improve the environmental

performance of the industry. Identify key areas to advance sustainable forestry (e.g. forest

protection, biodiversity, and soil maintenance) and set collective action agreements.

Build upon established partnerships such as the World Wide Fund for Nature’s (WWF)

New Generation Plantation Project and those fostered through the World Business

Council for Sustainable Development (WBCSD).

● Long-term Actions – Execute on commitments, share best practices among the coalition,

and advertise progress to stakeholders. Advocate for and influence member companies to

set shared goals and make pledges for improvement. Partner with government to create

monetary and other incentives for land use industries (forestry, farming, resource

extraction, etc.) to utilize less environmentally intense (fuel, topsoil use, replantation

needs, etc.) methods.

Engage customers and other key stakeholders in decision-making

Although Arauco requested we not contact key stakeholders at this time, significant benefits can

be gained by conducting studies on their customers and stakeholders. Specifically, understanding

their customers’ current sustainability efforts, their short and long term goals and their priorities

would provide further insight into what initiatives would be most beneficial to all parties.

● Inspiration for recommendations: Customer Analysis

● Short-term Actions – Engage customers and key stakeholder groups to identify and

measure their current sustainability efforts using collection tools such as surveys,

interviews, and focus groups.

● Mid-term Actions – Establish two-way communication vehicles between stakeholders and

Arauco to share the sustainability achievements of Arauco and solicit feedback to

continuously refine their efforts. This stakeholder engagement could occur across a

multitude of platforms (community events, online blogs and forums, etc.) to crowd-

source feedback, suggestions and engagement.

● Long-term Actions – Demonstrate commitment to these stakeholders by developing

action plans and commitments that incorporates stakeholder feedback.

Explore a recycling program for wood products

Many leading companies have begun to advertise the percentage of their product that comes

from recycled inputs, especially wood pulp products. Arauco has an opportunity to pioneer a

first-of-its-kind recycling or reuse program for other wood products through a take-back and/or

recycling program.

● Inspiration for recommendations: Forestry’s “A Mixed Bag of Reuse and Recycling”

● Short-term Actions – Evaluate the economic and environmental feasibility of a wood

product take-back and recycling program for end-of-use products typically destined for

landfills.

● Medium-term Actions – Engage other thought partners with existing take-back programs

and work with downstream customers improve business models for landfill diversion,

secondary product markets and product remanufacture.

Exhibits

Exhibit 1: Arauco’s Core Businesses

Exhibit 2: Customer Segments

Exhibit 3: Competitor Analysis

Company Location Size

($M

Rev)

Own

Forests?

Wood

pulp

Timber Panels

&

Boards

Biomass Paper &

Wood

Products

Arauco Chile 4.37 X X X X X

Canfor Canada 2.72 X X X

Fibria

Celulose

Brazil 3.01 X X X X

UPM Finland 13.79 X X X X X X

Stora Enso Finland 14.58 X X X X X

CMPC Chile 4.80 X X X X X

Domtar Canada 5.48 X X

References for the Competitor Analysis:

1 Canfor Sustainability Report 2012 (accessed April 22, 2013)

2 Fibria Celulose Sustainability Report 2012 (accessed April 22, 2013)

3 UPM Annual Report 2012 - 10-k (accessed April 23, 2013)

4 “Full of Forests. Full of Life,” UPM 2010 (accessed April 23, 2013)

5 “UPM’s Rules for Forestry and Wood Sourcing Activities,” UPM March 2012 (accessed

April 23, 2013)

6 Stora Enso Global Responsibility Report 2012 (accessed April 24, 2013)

7 “Stora Enso’s Policy for the Sustainable Sourcing of Wood and Fibre, and Land

Management,” Stora Enso December 2012 (accessed April 24, 2013)

8 “Stora Enso’s Statement on Climate Change,” Stora Enso December 2012 (accessed

April 24, 2013)

9 “Stora Enso’s Guidelines for Energy,” Stora Enso December 2012 (accessed April 24,

2013)

10 Empresas CMPC S.A. Sustainable Development Report 2011 (accessed April 24, 2013)

11 Domtar Sustainable Growth Report 2011 (accessed April 24, 2013)

Additional References:

· Arauco Pulp Article www.arauco.cl/_file/file_3382_pulp%20catalog.pdf

· Arauco Sustainability Article www.arauco.cl/_file/file_655_i+a-ingles-02.pdf

· Arauco Sustainability Article www.arauco.cl/_file/file_655_i%20a-ingles-04.pdf

· Arauco Sustainable Products www.sustainableforestprods.org/box1

· Arauco Timber Article www.arauco.cl/_file/file_4060_saw_timber_2011.pdf

· Orsnz www.orsnz.org.nz/conf34/PDFs/Philpott.pdf

· PEFC Chain of Custody www.pefc.org/standards/chain-of-custody·

· Tieto Supply Chain www.tieto.com/industries/forestry-wood-pulp-paper/forestry-and-

wood-supply-online-supply-chain-management