The groups said the USD 3 billion mill belonging to industry giant Asia Pulp and Paper (APP) was sourcing raw materials mostly from trees grown on drained peatlands, where haze-belching fires occur every year.
The mill produces a raw material which can later be made into paper.
Woro Supartinah, whose NGO was among the groups protesting the mill, called on the Indonesian government to "promote a broader set of interests" than just helping major companies reap profits.
The groups who protested the mill included Wetlands International, Eyes on the Forest and Rainforest Action Network. APP did not respond to requests for comment.
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Vast areas of peatland, which store carbon, have been drained in recent years using networks of canals to convert them into plantations for trees to produce pulp and palm oil.
The drained peatlands emit greenhouse gas carbon dioxide into the atmosphere, and also create arid tracts of land that are vulnerable to going up in flames.
Huge fires erupt on and around plantation land every year on Sumatra, much of it in peat.
About three-quarters of the plantations supplying APP's mill -- 6,000 square kilometres -- are on peatlands, the groups said.
Indonesia's government has in recent years stepped up efforts to protect peatlands, especially after the fires in 2015, which according to the World Bank caused $16 billion in losses to the archipelago's economy.