Scaling Up Financing for Sustainable Forestry in Paraguay

The World Bank is considering the approval of a $100 million loan (from a total project volume of $400 million) for “Scaling up Finance for Sustainable Forestry” in the eastern regions of Paraguay. The project would be managed by Paraguay’s Agencia Financiera de Desarrollo (AFD) and has been designed to promote wood production for the pulp mill industry, round wood, and fuel wood for energy generation. The project’s goal is to promote the creation of jobs and economic growth through the expansion of forestry value chains.

Environmental concerns

Increased deforestation and biodiversity loss. Although the project claims it will implement robust control measures to identify the sources of wood products, there is still a lack of clarity about what these measures would be, how the authorities will put the right surveillance mechanisms in place, and if they have the will and capacity to enforce such measures.

Expansion of the agricultural frontier. While the PID states that timber products will be certified, the project may indirectly push farmers and cattle ranchers to expand beyond the current agricultural border into the Cerrado biome. Cattle ranchers displaced by expanding plantations might seek new lands by extending or relocating their pastures into areas of rich biodiversity (forests, wetlands, and savannas). This could lead to biodiversity loss or degradation in Paraguay and Brazil.

Lack of consideration of cumulative impacts. Within Paraguay’s Oriental region and the neighboring area of Brazil, there are already eight pulp mill projects in different stages, including Paraguay’s largest paper mill, Paracel. A regional cumulative impact assessment should be required to understand the possible cumulative cross-border environmental impacts, but this is not mentioned in the project’s documents.

Water resources and soil degradation. Project documents are not specific about the tree species that will be promoted. This lack of specificity could lead to the widespread use of eucalyptus plantations (the only species mentioned in the documents and a species that is preferred by local businesses), which is known for its high water consumption. The documents also fail to mention the importance of adopting measures to diversify plantations, prevent habitat fragmentation, plant patches of natural biodiversity, or promote connectivity among the few protected areas left in the region.

The approach to forestry is misaligned with international biodiversity and climate conventions. Large-scale monoculture plantations of exotic species (in this case, eucalyptus) are incompatible with the conservation of natural ecosystems and should not be pursued, as they lead to the degradation and further fragmentation of natural habitats.

Overstatements concerning climate change mitigation and adaptation. The Bank presents industrial forestry as a significant contributor to climate change mitigation and adaptation. While forestry is framed as a “green” solution, monoculture plantations often have a net negative impact on climate resilience. Their carbon sequestration potential is lower than that of natural forests, and the environmental costs—such as soil degradation, water depletion, and biodiversity loss—offset any perceived benefits. Promoting water-consuming and fire-prone species in areas already impacted by climate change-induced drought will have devastating consequences for the environment and the local communities.

Water and Air Pollution. Paper mills and fuelwood incineration have substantial environmental impacts across multiple areas. They contribute significantly to air pollution by emitting greenhouse gasses and other pollutants such as nitrous oxides, sulfur dioxides, carbon monoxide, and particulate matter.

Weak oversight capacity of the AFD. It is unclear if the AFD has the institutional capacity to screen and supervise the timber plantation owners or other potential clients who will be borrowing funds from the AFD funds, and it is also unclear how the Bank is planning to support the AFD to increase oversight capacity.

Concerns Regarding Forest Stewardship Council (FSC) Certification. There are significant concerns regarding the FSC certification, which the Bank often cites as a guarantee of sustainable forestry practices.

Social Risks

Consultations and Stakeholder Engagement. The project documents do not provide evidence of any consultation being done as part of the formulation of the project. The documents state that the borrower in the future will develop a Stakeholder Engagement Plan that will focus on mapping relevant stakeholders and emphasize the inclusion of Indigenous communities and other rural populations in the preparation phase. Project documents also note that a Social Assessment will be done to identify if the sub-projects could impact Indigenous Peoples’ resources, land, or cultural heritage. If so, it must apply Free Prior and Informed Consent (FPIC).

Precarious and low labor-intensive jobs. While the project promises job creation, industrial forestry is typically low in labor intensity, with most jobs being seasonal or mechanized. This could lead to a net loss of livelihoods for smallholder farmers, who might be forced to abandon their land or work in precarious conditions for low or intermittent wages.

Risks of marginalization and displacement of local communities and Indigenous Peoples. The expansion of industrial-scale forestry, connected with the expansion of the pulp and paper industry, threatens to displace these communities, erode their land rights, exacerbate local conflicts over land control, and disrupt their cultural practices.

1. Develop and share a comprehensive review of environmental and social impacts prior to Board approval. This could enable the Bank and the borrower to better avoid, reduce, and mitigate expected impacts and risks to biodiversity and local communities. This review should involve independent experts and include informed, meaningful consultations with affected communities.

2. Shift the approach from industrial forestry to agroforestry and restoration efforts. Promoting plantation or industrial forestry as a sustainable solution for poverty reduction and climate mitigation is a false solution that the Bank should not support. Numerous examples in the region show that such forestry affects biodiversity and ecosystem services and fails to create quality jobs, leading to increased poverty and social exclusion. An appropriate management strategy for natural forests would include an agroforestry approach that preserves the ecological integrity of natural forests and supports the local community’s agriculture needs.

3. Strengthen the conservation of natural habitats and biodiversity. The project must include stronger environmental measures to protect and expand the patches remaining of native forests in Paraguay’s Orient, prevent an expansion of the agricultural frontier, provide sustainable water management, and prevent soil degradation. Also, a rigorous assessment of the long-term environmental benefits and costs should be adopted, particularly regarding carbon emissions and biodiversity loss. The International Panel on Climate Change has highlighted that biodiversity conservation and restoration holds the largest Climate Change mitigation potential after renewable energy. Restoration efforts should aim to rebuild native forests, support wildlife conservation, and enhance ecosystem services, all of which are critical for climate resilience and environmental health. The CBD highlights that Indigenous Peoples rely on biodiversity for food, medicine, shelter, and cultural practices, making its protection essential to their well-being. Biodiversity also provides the foundation for the development of sustainable agriculture.

4. Promote alternative sustainable livelihoods. Instead of promoting large-scale industrial forestry, the project should support smallholder farmers and Indigenous communities in developing sustainable agroforestry practices that preserve biodiversity, enhance food security, and build resilience to climate change. This would also mean better livelihoods and income sources for families.

5. Promote robust and effective consultation and engagement processes with local communities and Indigenous Peoples throughout the project cycle. Consultations with local communities, including Indigenous Peoples, campesino organizations, women, and other marginalized groups, should be meaningful throughout the project cycle. It must also be documented, culturally appropriate, and include detailed information about potential impacts, benefits, and risks. We recommend that the Bank promote a comprehensive dialogue on sustainable forestry practices, prioritizing sustainability, such as diverse native species, ecosystem load capacity, biodiversity conservation, and landscape connectivity.

6. Provide sustainable energy alternatives for Paraguay’s productive sector. The Bank should prioritize the development of genuinely sustainable energy alternatives for Paraguay’s productive sector, both primary and industrial, rather than relying on fuel wood. The current focus on fuel wood as an energy source is depleting natural forests and exacerbating environmental degradation. Complementary to Paraguay’s vast existing hydropower, the Bank should support sustainable energy sources with low-environmental impacts, such as solar and wind, whose international prices have made them a suitable alternative but still require further development in the LAC region.

7. Institutional strengthening. The Bank must assist Paraguay’s institutions in guaranteeing that wood from existing plantations is sourced sustainably. This includes screening of private sector partners for their environmental and social track record and commitment to sustainable sourcing. The weak governance and lack of clarity on land tenure currently allows for widespread illegal logging and unsustainable practices, which undermines any potential benefits of future forestry projects.