The admission by the Forest Stewardship Council, based in Bonn, threatens the credibility of an organization whose tree-with-a-check-mark logo adorns products for sale at big retailers including Home Depot Inc., Lowe's Cos and Ikea AB.

Some environmentalists have long complained the FSC's rules are too lax. A catalyst for the group's move to tighten its standard came earlier this month when it emerged that Singapore-based Asia Pulp & Paper Co. Ltd. -- one of the largest paper companies in the developing world and a target of criticism for its forestry practices -- planned to start using the FSC logo. The FSC has also faced questions about companies in other parts of the world that use its logo.

A rising number of "green" product-labeling organizations face a dilemma similar to the FSC's: how to maintain high standards while promoting their logos and increasing the supply of approved products to meet demand from conscientious consumers and big retailers.

For the past 14 years, the FSC -- with diverse members, from environmental groups to big retailers -- has endorsed paper, furniture, tissues and other products. Initially, the label signified that 100% of the wood used in a product was harvested by sustainable methods. The original standard measured a company's performance in specific forest areas and its overall environmental record.

But there weren't many takers. In 1993, the year it was founded, the FSC issued just three approvals and in the next few years not many more. To boost the supply of FSC-endorsed products, the organization in 1997 added a more relaxed labeling standard, allowing producers to use an FSC logo for paper in which just 50% of the pulp came from forests that that met the organization's original criteria.

For the rest of the pulp, companies had to show only that it came from legal sources. Products that passed this test could use an FSC logo with the words "Mixed Sources" printed underneath.

The number of FSC endorsements soared. As of last year, it issued 6,276 certifications. In all, the FSC's logo now adorns about $5 billion in products a year, in terms of retail sales, the FSC says.

The move to increase the number of certifications had an unintended consequence, FSC officials say, allowing forestry companies to put the FSC label on some of their products even if they are destroying large tracts of rain forest in other places. "Companies are free-riding on our name," said Andre de Freitas, head of operations at the FSC. "I feel bad about it."

The FSC, which has a headquarters staff of just 26, relies on a network of outside auditors to decide whether a company passes muster These auditors are paid directly by the companies they assess, a practice that has also drawn criticism.

For APP, the auditor was SGS Group, a Geneva-based surveying firm. Salahudin Yaacob, a Malaysia-based SGS executive who carried out the APP audit, said that under FSC rules, his role was limited to ensuring that about 472,000 acres of an APP tree plantation was legally owned by APP. Also in accordance with FSC standards, he gave a green light to APP to use pulp from that plantation mixed with fully FSC-certified pulp from companies in Brazil and Australia to make paper that APP could label with the FSC "mixed sources" logo.

But environmentalists charge that APP has devastated a Delaware-size portion of natural forest on Indonesia's Sumatra island, putting the survival of orangutan, tiger and elephant species there at risk. Several large paper purchasers, including Ricoh Co, Ltd., of Japan; Office Depot Inc. in the U.S.; and Idisa Papel, of Spain, have canceled contracts with APP out of concern that its practices destroy rain forests.

Canecio Munoz, executive director for environment at Sinar Mas Forestry, part of the Sinar Mas Group, of Indonesia, which also owns APP, says the company is working to improve its environmental standards.

But some environmentalists were dismayed. "If they [APP] can get an FSC accreditation, there must be something wrong with the system," says Nazir Foead, director of the Indonesian-species program at the Geneva-based World Wildlife Fund, a co-founder of the FSC.

After inquiries from The Wall Street Journal for this article, the FSC this month proposed new, tighter regulations to its members, which include environmental groups WWF, Greenpeace, and Friends of the Earth, as well as Ikea and Home Depot.

Heiko Liedeker, executive director of the FSC, rescinded the FSC's approval of APP products at the same time he proposed a tightening of the FSC's rules. "This company goes against our mission," he said in an interview.

APP reacted angrily. "We played by the rules," Mr. Munoz said. "To say one company or group cannot come out with an FSC logo is, to me, ridiculous." He said APP plans to seek certification for its products from a standards-setting organization that competes with the FSC.

The FSC's proposed new rules, which the group's board will vote on next month, are aimed at preventing any company that destroys rain forests or engages in illegal logging from using the FSC's label. "This is a significant change in the FSC systems, although it addresses an issue which has concerned FSC stakeholders for many years," the FSC said in a statement to members.

If approved, the measures will make it harder for companies to acquire the green credibility -- and higher sales -- that FSC approval confers. But it could also reduce the amount of FSC-approved paper at a time when big retailers say it already is hard to come by. Home Depot, the Atlanta-based home-improvement giant and an FSC member, formally expresses a "preference" for wood certified by the group. Yet so little is available that it still represents "under 10%" of the company's total wood purchases, says Ron Jarvis, senior vice president of environmental innovation at Home Depot.

Critics say it is too late to prevent the damage done to the label's credibility, and it remains unclear how it may affect the products already on store shelves. FSC officials haven't yet decided whether the new standards will apply to companies retroactively -- a move that could potentially require an extensive review of the practices of every approved forestry company.

While the FSC's standard has the widest geographic reach and the most endorsements by environmental groups, it competes with many rivals. In North America, for example, the timber-industry-originated Sustainable Forestry Initiative, or SFI, encompasses about 135 million acres of forests, while the FSC covers just 73 million acres, according to industry records. The SFI was started in 1994 by members of the American Forest and Paper Association in response to the FSC's founding a year earlier, but SFI officials say they now operate independently from industry.

Still, many environmentalists regard FSC as the best of the existing forest certification groups. "It's a question of how do we improve the system, not whether we can keep the system," says Brant Olson, director of the old-growth-forest campaign at the Rainforest Action Network in San Francisco. "Because if you look at the alternative systems run by industry, those are even weaker."

Yet Mr. Salahudin, the SGS auditor, cautions that the FSC's moves to tighten its rules could simply push big companies in the developing world to stop working toward approval from the council. The proposed rules, he says, "will surely drive away most of the big players in tropical forestry."

--Copyright wsj.com