While all Performance Standards are applicable to this investment, IFC’s environmental and social due diligence indicates that the investment will have impacts which must be managed in a manner consistent with the following Performance Standards: - PS1: Social and Environmental Assessment and Management Systems - PS2: Labor and Working Conditions - PS3: Pollution Prevention and Abatement - PS4: Community Health, Safety and Security - PS6: Biodiversity Conservation and Sustainable Natural Resource Management During the appraisal the land acquisition process was reviewed and found to be a willing seller / willing buyer situation with no impacts related to Land Acquisition and Involuntary Resettlement (PS5), no Indigenous Peoples (PS7) are known to be in the project area, and there is no Cultural Heritage (PS8) on or near the project site.

The proposed project is being developed in accordance with national regulatory requirements and international standards by a Sponsor committed to good environmental and social management. The project has sustainable raw material supply, will follow international labor standards, and avoids significant pollution. As documented further in this document there is no involuntary resettlement. With no indication of impacts related to Performance Standards 5, 7 and 8 and only readily mitigated environmental issues under Performance Standards 1 through 4, and 6, this is a Category B project.

The Sponsor has presented plans to ensure that the proposed project will, upon implementation of the specific agreed measures, comply with host country environmental and social requirements, as well as IFC’s Environmental and Social Performance Standards and industry guidelines. The information about how these potential impacts are being/will be addressed by the project is summarized in the paragraphs that follow. PS1: Social and Environmental Assessment and Management Systems: Social and Environmental Assessment: The approval procedure in Serbia includes several steps for a facility like Kronospan’s. After acquiring the land and achieving the correct (industrial) status of the land a construction project can be prepared and construction permits can be given. This step, which gave Kronospan the right to construct the plant, does however not give the right to later operate any processing facility. To achieve an environmental operating permit a process of Environmental and Social Impact Assessment (ESIA) was conducted in compliance with the national legislative and regulatory requirements. The main steps of this process include environmental and social baseline data gathering, an impact assessment study, and finally identification of specific measures for preventing and/or mitigation of identified potential negative impacts. The resulting report (attached in its original form and language to this ESRS) was first submitted to the relevant authorities, which studied the project and ESIA report and found it in compliance with the legal requirements. Subsequent to that finding the ESIA was disclosed locally in Lapovo, starting July 26, 2009. During the following disclosure period all affected parties have the right to raise concerns or objections. Based on no objections Kronospan has since obtained its environmental operating permit and can now operate the facility in accordance with the criteria given in the permit. - Social and Environmental Management System: Kronospan has developed a corporate management system and organizational structure appropriate for maintaining and continuously improving the environmental performance of all its international operations in line with its business lines. Kronospan has chosen not to certify these internal systems according to the common ISO/OHSAS standards at this time. Kronospan’s local operations are responsible for complying with these systems, and the implementation is secured by the use of an international deployed management group in close contact with all operations. “Auditors” for all relevant areas, like environmental performance visit the individual facilities on a regular basis. The title of Kronospan’s defacto corporate environmental manager in charge of overseeing the Serbian operations' adherence to the corporate standards is therefore “Interner Umwelt Wirtschaftsprufer” equivalent to “Internal Auditor on Environmental Affairs”. This person participated in IFC’s environmental appraisal of the facility in Serbia. To ensure compliance with national EHS legal requirements Kronospan engaged a local EIA consultant during the planning and approval stage. For the operational phase the local responsibilities at the operations level is well defined within the local management organization, and is frequently checked by the corporate internal auditor(s). Kronospan had outsourced the, now practically completed construction operations to reputable contracting companies. At the same time Kronospan had international staff on site since the initiation of the construction and this staff has closely followed and inspected the performance of the contractors. Land acquisition and planning procedures: Kronospan has acquired approximately 55 hectares of former agricultural land, which was re-zoned to industrial land consistent with national legal requirements, from private owners through a willing seller/willing buyer market transactions. The site for the facility was selected based on its location close to the center of the forest and thereby wood reserves in Serbia. Further the site need to be located with access to good infrastructure, both with respect to logistic connectivity and utilities. These criteria were all fulfilled near Lapovo. After identifying the current site and being assured by the local administration that it would be possible to establish production on the site, Kronospan extended acquisition offers based on a specified and uniform square meter price to the approximately 120 land owners having agricultural plots within the preferred area. The majority of the landowner agreed to a land sale according to the offered price. A few landowners either did not agree with the offered price or had an interest in maintaining the agricultural activities. For these landowners Kronospan continued the negotiations and found commonly agreeable solutions where the land plots in question were either excluded from the site (and remained in the hands of the original owners), or agreed with the landowners to accept a land swap in which they would receive some additional land area as a compensation for the swap. As a result the land acquisition process was rather slow, the land plot is not completely as originally planned, but the outcome was an acquisition fully based on common agreements and willing seller / willing buyer principles. PS2: Labor and Working Conditions: Once operating to full capacity the Kronospan facility in Lapovo will have 170-200 direct employees, and the service sectors supporting the project are expected to create a similar number of jobs. - Human Resources Policy, working conditions: Kronospan has a Human Resources policy which is designed to ensure compliance with corporate and national labor regulation and is consistent with PS2. The policy defines rights and responsibilities of the employee and employer, including terms of employment and working conditions, grievance mechanisms, and promotion of non-discrimination and equal opportunity. - Occupational health and safety: Kronospan has a tradition for designing its operations and H&S organizations to achieve good transfer of safety culture and knowledge between their international operations and hereby achieve low accident rates. These principles have also been followed for this new plant and it is expected that the accident frequencies will be equally low. In addition to accident prevention, Kronospan has developed workplace monitoring routines to prevent risk to worker health through exposure to, for example, noise, dust and chemical hazards. Kronospan has developed and implemented contractual procedures to ensure satisfactory occupational health and safety in its forestry contractor base, and will over the year of 2010 monitor the efficiency of these contract requirements and will, if need be, update these systems once the outcome of the 2010 harvest season has been checked. - Emergency Preparedness and Response: To minimize the potential risk of fire or explosions the total operation is equipped with a series of prevention and fire fighting measures. This includes automatic systems (equipment specific systems plus full sprinkler coverage in buildings), fire water stands and hoses around the full area, hand held extinguishers, smoke / spark / temperature detection as appropriate, fire alarm, fire water tanks and a fire pump station with both electrical and diesel driven pumps. Kronospan has also developed operational procedures for fire safety monitoring to control and ensure adherence to fire safety requirements and for emergency response. Kronospan has obtained appropriate approvals and permits from relevant supervisory authorities and technical gas services during the project design and implementation phases. PS3: Pollution Prevention and Abatement: The pollution prevention measures at Kronospan follows the tight principles adhered to at all Kronospan facilities. These principles are established at a corporate level and are then implemented in all Kronospan facilities, either from the very start of production when new facilities are constructed (as this facility) or later through action plan upgrades when existing facilities are acquired. Emissions to air. The facility has varied emissions to air as follows: Filtered air arising from wood dust control equipment used with sanding and cutting processes and chip preparation; Combustion products arising from the natural gas fired thermal fluid heater; Combustion products, water vapor and organic compounds released from the chip dryer; and Discharge of fumes arising from the press process. Air emissions from dust control equipment are, by adhering to the corporate design standards, kept below a maximum of 10 mg particulate/Ncm where cyclones are used due to high temperatures, and to below 3 mg/Ncm where bag filters can be used. Measurement shows that NOx emissions from the thermal fluid heater are maintained at around 170 mg/Ncm, within the local and IFC requirements. Particulate and sulfur dioxide emissions are not of concern with this natural gas-fired equipment. The chip dryer is heated using hot gas generated by combustion of wood dust and natural gas. NOx emissions from the dryer at the incineration of pulverized wood are 450 mg·Nm-3. The fuel mix means that sulfur dioxide emissions are not of concern. Exhaust gases from the chip dryer are substantially recycled within the dryer, providing for energy recovery and also permitting combustion of formaldehyde and other organic compounds driven from the wood heat, with a small proportion of the circulating gas flow exhausted through a wet cyclone. Formaldehyde remains is an important parameter to control, both as remains in the product and in the ambient emissions, in the production of wood / resin based products like the boards produced at Kronospan. To ensure the appropriate occupational air quality with respect to formaldehyde the board press has suction ducts to collect the released gasses and remove them from the working environment. Atmospheric discharges are well below local and IFC requirements. For the product quality Kronospan is adhering to the European E1 quality standards to ensure acceptable low rest levels of formaldehyde after the production process. Solid waste from the production consists mainly of ash from the biomass burning and melamine containing cutting waste from the lamination process. Both these waste types are scheduled to be deposited at a local landfill. Maintenance chemicals/oil will be handled with the help of approved special waste handlers. Waste water from within the production will be internally recycled with zero discharge. Domestic waste water, in the amount of up to 40 cubic meters per day, is collected and treated in a bio-filter before being released to a public discharge channel. The BOD of the treated domestic wastewater will be below 30 mg/liter. Storm water from all paved areas of the Kronospan facility will be passed through a 3,000 cubic meters settlement pond designed for the control of sediments and oil/grease before being released to the public discharge channel. The production at Kronospan is based on round wood received from forest operations and up to 50% of waste wood collected from saw mills etc. The waste wood would, if not used at Kronospan, otherwise be incinerated or disposed of in landfills emitting methane. By incorporating these waste and low value materials into a useable product the net impact is sequestration of carbon that would otherwise be lost. In 2011, after reaching full production from the start in 2009, the CO2 emission caused by the production at Kronospan will be 88,527 tons. The breakdown of sources for the resulting CO2 emission is as follows: 58,185 tons (65.7%) emitted from the burning of carbon neutral biomass, 15,446 tons (17.5%) from natural gas used in heaters and driers, and 14,896 tons (16.8%) indirectly caused by electricity produced and delivered by the Serbian national grid. The development of the CO2 emissions from the start of the production in 2009 till the middle of 2012 is graphically shown in an attachment. PS4: Community Health, Safety and Security: The Kronospan site is located outside the city of Lapovo within an area dedicated to industrial use according to the land use plan. The site is located approximately 500 meters south of Lapovo town along the West side of the main highway passing from Smederevo to Nis. Opposite of the highway the site is bordered by a main rail area, and to the south the site is bordered by some small farm lots and other industries. This location effectively separates the Kronospan site from any residential areas (the nearest residence is 350 meters from the fence line), and the main community health and safety issue is thereafter limited to the transport corridor used for receiving the raw materials, mainly wood, needed for the production and the dispatching of the final product. Based on the maximum production capacity of the plant up to 600 tons of materials will have to be received and dispatched every day. With estimated truck loads of 20 tons per vehicle, and with different types of vehicles used for delivering the raw materials and dispatching the product a total of 60 truck visit to the site will be expected every day. To avoid that this traffic will have a negative effect on the traffic pattern in Lapovo a new highway access ramp is under preparation with a direct access to the Kronospan site. The environmental and traffic effects on the local population will therefore be limited. Kronospan is equipped with several systems to avoid fires and/or limit their effect if or when a fire breakout. Further, Kronospan is obliged to continuously develop and maintain an emergency response plan in corporation with the local authorities to ensure the safety of its employees and limit effects on other stakeholders should a fire occur. PS6: Biodiversity Conservation and Sustainable Natural Resource Management: Forests in Serbia are nearly equally split between state owned forests and privately owned forests. Only a few forests in Serbia are certified by FSC to have sustainable forest management practices. Forest certification is still not a commonly know parameter in Serbia, though there is almost 200,000 ha of FSC certified forests in the country. Nevertheless the laws and the state forest authorities, which has the oversight responsibility, are ensuring that all the forests are maintained. Clear cut is not allowed in Serbia, except when a forest fire has made this inevitable and replanting is mandatory for all existing forest areas. Kronospan does not have any captive wood supply and will need to obtain its wood supply from the open market. To source its wood supply Kronospan will pursue two sources; i) collection of wood waste from saw mills and other raw wood processors. This could supply up to 50% of the wood need for the operation, but has a tendency to be highly variable over time, ii) engage in supply contracts with selected reliable wood supply / forest management companies in Serbia. According to Kronospan, some of these are potentially interested in pursuing FSC certification of their sources over time, and cooperation with such companies will help Kronospan ensure its long term supply of wood. The attached ESAP include the establishment of a Chain of Custody (CoC) scheme to ensure all wood received is legally harvested, and a schedule for certification goals to ensure the sustainability of the wood sources.

Kronospan has engaged actively with the local community of Lapovo, both during the land acquisition phase, the construction phase, and the environmental permit approving phase. Kronospan has seen information disclosure as an important mean to explain their future plans and employment opportunities to the local stakeholders. For Kronospan it is also important that the supporting structures, like trucking and servicing companies understand their local needs and are given an opportunity to create these jobs locally to the extent possible.

The full Environmental Impact Assessment has been disclosed locally as part of the approval process. This disclosure took place in Lapovo, which is located close to the site, and started on July 27, 2009 after the EIA had been reviewed by the local authorities and found acceptable for further processing and approval, subject to broad acceptance during the disclosure process. Kronospan will also make the current ESRS review available locally as part of their continued interaction with the local community.