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 PS5: Land Acquisition and Involuntary Resettlement PS6: Biodiversity Conservation and Natural Resource Management The population of Jiangxi is predominantly Han-Chinese, the mainstream ethnic group in China. About one third of Guangxi’s population is made up of ethnic minority groups such as Zhuang and Yao. In the Project areas in Guangxi, ethnic minority persons lead a lifestyle broadly similar to that of the mainstream Han-Chinese population. Hence IFC concludes that this Project does not trigger PS7: Indigenous Peoples. The appraisal found no evidence of the presence or impact on issues associated with Cultural Heritage.

This is a Category B project according to IFC’s Environmental and Social Review Procedures. The Project will result in a limited number of environmental and social (E&S) impacts which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. Key environmental, health and safety, human resources and social issues that were reviewed included: environmental and social management system (ESMS); contractor and supply chain management; community engagement; labor and working conditions; occupational health and safety; water and energy use and efficiency; greenhouse gas emissions; air emissions, and water and solid waste discharge; community health and safety; land acquisition; and biodiversity preservation and sustainable forestry management.

PS1: Social and Environmental Assessment and Management System

As per host country regulatory requirements, Guangxi Hwagain Group Co., Ltd (“Hwagain” or “the Company”) completed an Environmental Impact Assessment (EIA) for each of its two existing facilities in Ganzhou, Jiangxi and in Nanning, Guangxi. EIAs have also been completed for the expansion phase of the Ganzhou facility. The Company has designed and constructed its facilities according to EIA requirements. EIAs were approved by the local Environmental authorities prior to commencement of facility construction.

The Company has an environmental and social management system (ESMS) in place, partly based on the ISO9001 quality assurance standard and ISO14001 Environmental Management standard, against which the Company has been certified since 2007. As part of ISO requirements, the Company retains copies of controlled documents. The Company uses a quantitative-target-based system down to the production line level to manage and monitor operational and employee performances, similar to a Key Performance Indicator system. Its day-to-day monitoring activities are guided by internal company policies such as the “Procedures on managing environmental incidents”.

At both the Nanning and Ganzhou processing facilities, the following departments take up E&S related responsibilities: Safety and Environmental Management (SEM); Facility and Process; and Human Resources. Department heads report to the facility general manager who in turn report to the Group General Manager. Twice a day, the Safety and Environmental Management department conducts checks of environmental performance data (e.g. wastewater BOD level) at pre-determined points throughout the production process, compares real-time machine-recorded data against manually-collected data for any discrepancy, and compiles a summary report to the facility general manager. Each of the facilities regularly prepares and submits operational reports to the Group general manager, and there are regular operational meetings at facility and group levels to discuss performance issues including environmental-related issues. The environmental department liaises with local environmental protection bureaus (EPB) on real time monitoring of waste emission levels.

On the supply side, the Nanning facility buys half of its total bamboo (whole bamboo and sliced bamboo) needs from about 1,700 third-party suppliers who in turn procure from roughly 6,000 bamboo-growing farming households within a 100km radius of the Nanning facility. The rest of the bamboo demand is supplied by bamboo plantations leased to the Company by local communities and under the Company’s direct management. Third-party bamboo suppliers are typically local businessmen from villages and townships who have a relationship with local farmers. Purchases are made at spot prices advertised several times a year at local newspapers and at public places in counties and townships.

The Company has a program in place, in concert with local Governments in the Nanning area, whereby farmers are encouraged to grow bamboo and would receive an upfront subsidy and technical advice from the Company, as well as a guaranteed minimum purchase price for the harvested bamboo. The program now covers about 60,000mu (4,000 hectares) in planted area.

At present, the Nanning facility sources its scrap wood and bark from about 50 traders who procure the materials from more than a thousand small to medium veneer and other wood processing facilities within a 50km radius of the Nanning facility. Traders sign a one-year renewable supply contract with the Company.

The Ganzhou facility buys all of its bamboo needs from about 18 counties and townships in the Ganzhou area through about 30 traders who in turn procure from several thousand individual bamboo farmers in the area. It sources scrap wood and bark through 5 traders who procure from about 3,000 small veneer and primary wood processors, and furniture makers. The Company requires all commercial suppliers to produce a formal Government-endorsed receipt as a condition of purchase.

Hwagain does not have shareholdings in supplier entities. While the Company has close relationships with its suppliers, it can switch to other sources if necessary given the abundant supply of bamboo and scrap wood in the open market.

Suppliers are also not exclusively dependent on the Company for their business viability:

i) Hwagain is the only major buyer of bamboo in both the Nanning and Ganzhou areas, and farmers do grow more bamboo than they normally would have had the demand from Hwagain not existed. However, IFC found that bamboo typically makes up a small percentage (about 10%) of the average rural household income, and that farmers would grow bamboo in any case given that they need it to make rattan straws used for bundling together harvested sugarcane, and they value the usefulness of bamboo in reducing river bank soil erosion;

ii) Scrap wood also does not make up a significant part of the overall income of suppliers and wood processors.

Based on the above information, IFC concludes that the Company’s bamboo and scrap wood suppliers are supply chain partners and not its associated facilities.

PS2: Labor and Working Conditions

Hwagain has a total workforce of around 3,100 persons, of which 85% are employed at the two pulp and paper facilities. Female employees make up about 45% of the workforce at processing plants and about 30% at forestry operations. At processing facilities over 70% of workers are aged 20-30. All workers are directly hired by Hwagain. The Company states that they have provided Government-mandated social insurance coverage for all workers, whether they hold a rural or urban residence account (“hukou”).

Terms of employment, and the Company’s human resource policies and practices – such as working hours, overtime payment and the provision of social insurance - adhere to National Labor Laws and other relevant regulations, and are advertised to all staff through the Company’s intranet. The Company regularly trains staff to ensure they are operationally competent. Housing on-site is provided for single staff at the two processing facilities. While the Nanning and Ganzhou processing facilities are decade-old or older, they are reasonably well maintained and a tour confirmed that working conditions were clean. Terms of employment are formalized into employment contracts and an employee manual and all staff acknowledges their rights and responsibilities when they sign the letter of appointment. Remuneration is competitively determined by referencing market rates and includes a performance-based bonus component.

The Company enlists 300 plus contractors to perform various tasks at processing facilities and at its plantations: i) Seven contractors hire about 150 workers to unload bamboo and scrap wood from incoming trucks into raw material storage pits at the processing facilities; ii) At plantations, 300 plus contractors hire up to 3,000 migrant workers to perform various tasks such as land preparation, planting, and harvesting.

At Nanning plantation sites, up to 50% of contractor workers are ethnic minority workers from southwestern provinces, brought to the sites by line supervisors who come from the same home towns. The Company states that in order to attract ethnic minority workers, up to a 20% wage premium needs to be paid by contractors, accounting for their higher level of skills and efficiency working in mountainous settings, and to compensate for working away from their home towns. The fact that local farmers can obtain better returns from sugarcane farming partly explains less willingness on their part to take up jobs as contractor workers.

The Company has placed various labor related provisions in its agreements with contractors and it verifies their implementation through both regular and unannounced inspections. These include provisions such as i) requiring all contractors to provide accident insurance coverage for workers; ii) mandating the use of personal protective equipment by contractor workers; iii) ensuring that contractor workers get paid on time, through phone call alerts to workers as soon as the Company has disbursed a payment to a contractor; and iv) requiring contractors to provide ID copies of contractor workers. From August 2011, the Company will require all its contractors to be registered companies in order to be considered for work assignments.

At plantations, contractors typically rent a house from a nearby local rural community to accommodate their workers, and hire a full time cook to prepare meals. Workers would sometimes live at plantation sites located far from the village house for up to a month, in which case, contractors would construct makeshift shelters for workers. The living and toiletry conditions at several such sites visited by IFC were sub-optimal. The Company will establish accommodation standards applicable to contractor workers, embed these standards into contractor agreements, and verify compliance through site inspections.

There is a union at the company with 95 plus percent of employees enrolled as members. The union communicates company policies to employees and collects worker feedback; and organizes sports and extra-curricular activities for staff and family members such as bi-annual tourist trips. The Company is in the process of drafting a collective bargaining agreement to define and communicate human resource issues applicable to all employees such as working hours and salary scales. IFC found no evidence of the use of child or forced labor.

Workers communicate with management through their production line supervisors. They can also approach the Human Resource (HR) department in person, by writing a letter, and by email. In the past few years, the HR Department has been receiving on average several instances of employee feedback per month which were followed up by the Company’s corporate management department, with the follow-up results documented and posted on the Company intranet. The Company maintains a whistleblower hotline for employees.

The Company stated that labor-related litigation cases arising at the Nanning facility from 2007-2010 have been resolved in court or out of court.

In 2009-2010, the Company had a relatively high turnover for front-line staff (excluding turnover during the 3-month probation period) and for supervisory and managerial staff (excluding turnover during the 6-month probation period). The Company attributes this partly to a broad-based change in labor relations in China which has led to i) a general shortage of front line workers; and ii) younger workers becoming more likely to switch jobs frequently. At the same time the Company recognizes a clear need to reduce turnover. Since 2010 it has taken a number of steps to this end and states that it is starting to see signs of improved retention: i) restructuring work shift arrangements such that the need for consecutive work shifts is reduced and workers also get more rest days per month; ii) providing a seniority-based monthly stipend in addition to the basic salary and bonuses; iii) organizing more recreational and sport activities for staff and their families; iv) each department will be held accountable if turnover were to exceed a certain percentage target; v) line supervisors holding weekly discussions with each subordinate to strengthen communications; and vi) providing optional housing provident fund coverage for all workers.

Hwagain will commission an experienced third-party labor consultant to review its general labor policy and procedures, and circumstances behind dismissals, turnover, and labor-related litigation cases in the past two years. The goal of the review is to identify, in addition to steps already taken by the Company, opportunities for other practical actions that can be reasonably taken by the Company to maintain a high level of productivity/efficiency and at the same time improve staff retention and reduce cases of litigation. Recommendations made by the consultant will be adopted by the Company after consultation with the consultant to agree on a final set of practicable actions.

The Company states that there have been no fatalities or major work-related injuries in the past two years either at processing plants or in plantation operations. Its environment and safety department officers conduct monthly inspections of safety-related practices of workers against an established list of major hazard points throughout the production process. Every quarter the facility General Manager leads a safety inspection of the entire facility. A tour of the facilities by IFC confirmed that workers were using personal protective equipment, and the Company states that employee health check-up results from the past year have not revealed any trends of chronic work-related health problems.

PS3: Pollution Prevention and Abatement

Wastewater generated at Hwagain processing facilities is treated by an on-site waste water treatment facility (WWTF) consisting of three stages – pre-treatment (radial flow sedimentation tanks to segregate and remove sludge), Biolak microbial treatment; and final treatment (bubbling tanks into which coagulants are added to trap remaining impurities into a sludge medium). The WWTP has a design capacity of 15,000 m3 per day and at present about 10,000 m3 is treated per day at each of the two facilities. Treated wastewater is discharged to the local rivers with an average COD content of 100mg/L (incoming water COD averages 20mg/L) – downstream water users are all industrial or commercial entities. Storm water at both facilities is collected in a system separate from wastewater collection and transport.

Monitoring results from 2010 indicate material compliance with national (GB3544-2008 “Pulp and Paper Industry Water Pollutant Discharge Standard”) and IFC guideline limits on metrics such as pH, BOD5, COD, TSS, N and P. The local Environmental Protection Bureaus (EPB) conducts real-time monitoring of waste water discharge data through an online system connected to the Company’s WWTP system, and also make unannounced inspection visits several times a year. The environmental department of the Company checks waste discharge results twice a day and accordingly compiles statistics for facility management to review.

The Guangxi EPB website indicated that June 2009 test results showed AOX (Absorbable Organic Halogen) levels from the Nanning facility’s waste water discharge to have exceeded national limits.

The Nanning and Ganzhou plants employ a 3-step (Chlorination + Alkalization + Bleaching) bleaching process, which uses elemental chlorine. Both existing facilities are relatively older facilities of small scale and there is limited scope for expanding their capacities and for revamping the bleaching process to become elemental chlorine free (ECF) in such a way that is commercially feasible. As such, under this Project the Company has already started constructing a new ECF pulp mill at Ganzhou with an expanded capacity of 170,000 tpa to replace the existing mill, and construction is expected to be completed by the end of 2011.

At Nanning, the Company is likely to continue using its existing facility in the next few years. While it expects to move to a new ECF facility at some point in the future, the timing of the move cannot be confirmed at this time.

In the meantime, the Company will undertake bleaching process enhancement through staged actions such as the following. Actions (i)-(iii) listed below will need to be taken while the rest of the actions will be undertaken as necessary, with an end goal of achieving satisfactorily low levels of effluent dioxin and furan content.

(i) Before bleaching changes, take samples from the final mill effluent, from the river upstream and downstream of the discharge point, and from river sediment downstream of the discharge point to be tested for dioxin and furan content. This will define a base-line.

(ii) Increase the pH value of bleaching up to 4 through the use of cost-effective pH control equipment;

(iii) Then conduct the same dioxin and furan tests as that defined under action (i). If test results do not show dioxin / furan content of effluent at satisfactorily low levels, proceed with additional measures to control dioxin/furan production, such as a combination of actions (iv)-(vi) below.

(iv) Make modifications to the existing effluent plant and waste water treatment process;

(v) Explore the use of a better quality washer to increase recovery of the chemicals and decrease consumption of bleaching chemicals, which can lead to reduced carry-overs;

(vi) Partially replace chlorine with hydrogen peroxide bleach, and of up to 50% of the chlorine with chlorine dioxide.

(vii) Conduct the same test again as that defined under action (i). If at this point testing results do not show dioxin / furan content of effluent at satisfactorily low levels, the Company will replace elemental chlorine bleaching with an elemental chlorine free (ECF) process at the existing facility, or relocate to a new ECF facility.

At both facilities, the water supply is pumped from a major river nearby with required approval in place from the local water authorities. In 2010, the Nanning and Ganzhou facilities used about 4 million and 3 million m3 of water respectively. This translates into an average consumption of 56 m3/tonne paper for the two facilities. At the Ganzhou facility, up to 7,000 tons per day of process-generated whitewater is reused. At Nanning, about half of the whitewater is re-used in production processes, and the Company has retrofitted pulp washing equipment to reduce water loss.

The Nanning facility has two coal-based boilers, one biomass boiler, and two recovery boilers; while the Ganzhou facility has two coal-based boilers and one recovery boiler. Air emissions from facility boilers are treated by a combination of water film scrubber and flue gas desulphurization technologies. Results from 2010 emission monitoring reports indicate the following: i) Nanning - NOX and SO2 levels are under while particulate matter (PM) level is over IFC guideline limits; ii) Ganzhou – SO2 level is under and PM level is over IFC guideline limits. The Company will take necessary actions on a best-effort basis to bring the Nanning and Ganzhou PM levels under the IFC EHS Guideline limit.

Total 2010 Greenhouse Gas (GHG) emissions from the Company’s direct operations are estimated at 296,000 tons CO2-equivalent, attributable to grid electricity usage, fuel consumption and the use of cooling units. Given that this is over the IFC reporting threshold of 100,000 tpa, the Company will report GHG emission estimates to IFC annually, calculated using an internationally recognized methodology.

In 2010, the Company consumed about 118 million kWh of grid-supplied electricity, 85,000 tons of coal, 919,000 liters of diesel oil, and 17,000 liters of gasoline. Energy and energy efficiency data provided by the Company indicates that the Nanning facility had a heat energy efficiency ratio of 20 GJ/ton of paper and an electrical energy efficiency of 980 kWh/ton of paper; while the Ganzhou facility had a heat energy efficiency of 18.5 GJ/ton of paper and an electrical energy efficiency of 914 kWh/ton of paper. Electrical energy efficiency figures for both facilities fall within the ranges defined in the 2001 European Commission Integrated Pollution Prevention and Control (IPCC) document; while heat energy efficiencies are above the IPCC defined range of 10-14.

The Company will commission water and energy efficiency audits at the Nanning and Ganzhou facilities by qualified professionals. The audits will recommend actions to achieve further resource savings to the extent feasible, and will indicate expected resource savings from implementing those actions. The Company will implement cost-effective actions recommended by the audits.

The Nanning facility re-uses about 50,000 tons of black liquor, a by-product of the pulp production process, as fuel for two recovery boilers on site; and its retrofitted biomass boiler utilizes low grade wood and bamboo waste as fuel. The facility has taken steps to improve air flow in the coal-based boiler; retrofitted various motors with frequency converters; used LED lights; and replaced some air conditioners with water-cooled units. The Company states that these measures have led to a 30% reduction in overall energy usage. At the new Ganzhou facility currently being built, a waste heat recovery (WHR) system will be installed, consisting of a network of interconnected heat ducts which collect excess heat emitted from various points in the production process to power on-site turbines. The WHR system is expected to provide up to 60% of total facility electricity needs.

In terms of solid waste management and material re-use: i) About 17,000 tons per annum and 24,000 tpa of black sludge are generated from the Nanning and Ganzhou facility WWTPs respectively - this is collected by local landfill operators; ii) About 7,700 tpa of coal ash and cinder from the Nanning and Ganzhou facilities, and about 66,000 tpa of calcium carbonate generated from the alkali recovery process, are sold to local makers of cement and environmental bricks; ; iv) About 50,000 tpa of calcium carbonate generated at Ganzhou is collected by a local landfill company; v) 450 tpa of shredded wood or bamboo powder is re-used as fuel at the Nanning biomass boiler.

Results from tests conducted in 2010 indicated facility peripheral noise levels to be in the 45-57 dB(A) range, which is under the level (industrial, commercial) listed in World Bank Group (WBG) Environmental Health and Safety Guidelines. The Company does not test for noise levels or indoor air quality within facility premises, and will do so in future as part of its environmental monitoring program.

PS4: Community Health, Safety and Security

Hwagain facilities are located in the outskirts of Nanning and Ganzhou in mixed-use (industrial and residential) neighborhoods and there are a number of rural houses within a 300 meter perimeter of the facilities. The Company states that there have been no complaints or issues raised by local communities regarding its operations. Households near the processing facilities and plantations interviewed by IFC spoke favorably of the Company and recognized its role in local job creation and economic development. The Company has detailed emergency preparedness and response plans at its facilities to handle fire, environmental and safety emergencies. Its hires a number of security guards at its premises and there have been no security incidents in the past few years.

The Company provided a list of key hazardous materials (e.g. hydrogen peroxide, liquid chlorine, sodium hydroxide, aluminum sulfate) and quantities used in its production processes. It has detailed guidelines regarding the use, storage, and disposal of these hazardous materials, and commissions certified third-party contractors to transport and dispose of such materials. Typically there are 20-25 one-ton tanks of chlorine gas stored on site, in an enclosed room where the chlorine concentrations are continuously monitored. Should the concentration exceed the pre-set limit, chlorine is automatically oxidized into ferric trichloride. As a second safety mechanism, there is also an alkaline pool to neutralize chlorine. At plantations, the use and storage of chemical fertilizers and pesticides is governed by Company policies and procedures.

The Company has established life and fire safety (L&FS) procedures at its facilities and plantation operations. It has fire safety approvals from local fire departments. Fire-fighting equipment, including smoke detectors, extinguishers and fire reel hose as well as proper signage was installed at facilities visited, and local fire brigades and the Company conduct annual equipment checks and fire drills. Fire-fighting equipment and water supply is installed at regular intervals in the wood and bamboo storage areas. The Company confirmed that since start of operations, there have not been any L&FS or public health and safety incidents at its facilities and plantations.

PS5: Land Acquisition and Involuntary Resettlement

The Company leases forest land in Guangxi and Jiangxi to develop its bamboo and wood plantations. According to the Company, all land leases they enter into are willing-buyer-willing-seller transactions, and they would only proceed if counter parties particularly communities transact out of free will.

At about 15 prefectures, counties and townships in Guangxi and southern Jiangxi, the Company has leased mainly barren land or collective forest land from local communities to develop its bamboo, eucalyptus, and pine plantations. By area, about one quarter of Guangxi land plots has been leased through about 200 middlemen, with the other three quarters directly leased by the Company from local communities (mainly village collectives and also some individual farmers). In Jiangxi, about 60% of the Company’s landholding has been acquired through middlemen. About 65% of the Company’s landholding in Guangxi consists of social land (i.e. use rights held by communities) and the rest are state-owned land leased from state forest farms. At one location in Guangxi visited by IFC whereby the Company leased land from the local state forest farm (SFF), an interviewee pointed out that there have been historical land boundary disputes between the SFF and local communities, but villagers recognize that the Company is a tenant and not a party to the dispute.

The price level paid for each plot of leased land is determined according to a system of land classification at the Company whereby a minimum lease price per mu is set for various categories of land such as wasteland, slash-and-burn land, and shrub land. Depending on various factors (e.g. slope gradient, soil type and fertility, and moisture availability), a premium may be added to the minimum price for a given plot.

Price setting is part of a process of land acquisition due diligence conducted by the Company on every potential land plot offered to it, before making a decision to acquire. During this process, the Company conducts household and community interviews to gain an understanding of any past history of boundary or other land-related conflicts, and the relationships between brokers and communities. Its legal department obtains copies of original land contracts and use rights documents to verify their validity, and for village collective land, copies of the legally required consent document signed by at least two-thirds of the members of a village to lease their collective land to a third party. In cases where a community has not yet leased its land to a broker or the Company, the Company makes sure it sends representatives as an observer to join the community meeting to witness the process of obtaining two-thirds consent; prior to the community meeting the Company conducts household interviews to understand community issues if any.

Based on all information obtained, the Company’s due diligence team then meets to collectively decide whether to go ahead with the acquisition. Due diligence results including scanned documents for each potential land plot are entered into the land database section of the Company’s intranet which is searchable by location and contract number and linked to a GPS system. The Company’s internal audit department then reviews those results to verify their accuracy; if necessary it conducts further field work for verification. Once it provides clearance the transaction can be confirmed. The above due diligence steps are captured in company procedures posted on its intranet. IFC has reviewed some of these procedures and documents in the Company’s land database, and community visits indicate a positive view among interviewed villagers regarding Hwagain’s land leasing process.

Where there were earlier transactions between communities and land middlemen, before entering into a contract with the middlemen involved, the Company would check to verify the history of transactions, including the lease price received by the community. If the community price were deemed too low, the Company would either make up the shortfall to the community directly, or require the broker to make up the shortfall through what he receives from Hwagain. This is done in the presence of community members and broker(s) for all to see.

There is a second type of land acquisition arrangement, whereby the Company uses brokers to identify and acquire land on its behalf, paying the broker a fixed commission. There are also other land acquisition arrangements adopted by the Company whereby communities, brokers, and Hwagain may share profits from wood and bamboo sales, partially in lieu of lease fees paid by the Company to communities or brokers. The Company conducts the same level of due diligence under various arrangements.

The Company states that it is important to undertake detailed due diligence and manage broker-community relations given that the ongoing forest tenure reform process has not been completed in Guangxi, and therefore land transactions can be prone to increased social and contract risks. In Jiangxi where forest reform has already been completed, it undertakes the same process as part of its risk management.

In order to build its new processing facility in Ganzhou, in 2009 the Company acquired two separate (but closely located) plots of land involving an area of 280mu and 1,000mu respectively. Land use rights of these land plots were originally held by about 15 and 20 households respectively in 2006-2007. Those households lost mainly house plots but also some agricultural land. The 20 households were compensated at about RMB1,000 per square meter for their lost houses, and about RMB2,000 per square meter for store front spaces. The 15 households were compensated at a level of about RMB18,000 per mu. Compensation levels were set according to standards stipulated in land acquisition directives. Affected persons from the 15 households interviewed by IFC acknowledged that what they received was consistent with replacement value at the time. They recognized and appreciated the Company’s positive contribution to local development and job creation.

The Company will interview members of the 15 affected households in an appropriate manner to understand and document their viewpoints. It will work with the households to identify actions that can be reasonably taken (e.g. additional vocational training) to contribute to livelihood restoration.

In Guangxi where the Company may potentially move to a new facility, it will ensure that the land acquisition process fulfills IFC’s PS5 requirements by documenting household and compensation information on affected persons and land acquisition outcomes which verifies an equitable process and compensation at replacement value at a minimum. Such information will include those related to original land acquisition before the Company started participating in the land acquisition process.

PS6: Biodiversity Conservation and Natural Resource Management

The Company states that its bamboo plantations and nurseries contribute positively to the local ecology due to: i) bamboo’s ability to improve soil moisture retention and reduce soil compaction due to cash cropping; and ii) the fact that every year only mature bamboo is harvested, leaving behind younger bamboo stands and large amounts of foliage and fallen twigs which provide green fertilizer for the ground and contribute to soil holding capacity. This view was shared by local farmers interviewed by IFC, who stated that they have had a long tradition of planting bamboo, particularly along river banks, as a means to reduce soil erosion and river bank sedimentation, and therefore control the severity of flooding during rainy seasons. There were no known areas of critical habitat at or near Hwagain plantations, which are not located near major national or provincial conservation areas. The Company states that given land leased by local communities to Hwagain used to be mainly degraded communal land, secondary forests, and shrubs, the planting of bamboo is seen as improving local soil conditions and moisture content. At its Ganzhou and Nanning plantations, the Company uses mainly six varieties of bamboo, of which four are from the local areas. IFC found no signs of the introduction of invasive alien species due to Company operations. The Company sets aside about 5% of its plantation areas in which other plant and grass varieties are grown, to serve as fire breaks.

The Company supports the principle of sustainable forestry, and works with local forestry bureaus to this end. Given the emerging market need for FSC-certified (Forest Stewardship Council) products, it is in the Company’s long term interest to initiate a pilot program to certify a small area (e.g. under 5,000 mu) of its bamboo, pine and Eucalyptus plantations against FSC, including group certification of a small area of land managed by local farmers who supply bamboo to the Company. This can be a cost-effective initiative for the Company to prepare for the up and coming FSC market.

In line with the principle of sustainable forestry, the Company will also engage a competent professional to identify the following areas, if any, at its self-managed and supplier plantation sites in Guangxi and Ganzhou: i) High Conservation Value Forests (HCVF); ii) biologically diverse riparian zones (BDRZ); and iii) ecologically vulnerable areas around surface waters. Based on the identification results, the Company will: i) ensure an appropriate percentage area of set-asides at those plantations to protect HCVFs nd BDRZs; and ii) conduct regular soil fertility tests in vulnerable areas around surface waters and take necessary actions to maintain soil fertility and reduce soil erosion.

No local communities near Hwagain facilities or plantations have been significantly affected by environmental risks or impacts from the Company’s operations. The Company is a major contributor to local employment creation and supply chains through its bamboo and scrap wood procurement activities. In its business operations it actively engages with local stakeholders such as local forest bureaus, traders, contractors, and fertilizer suppliers e.g. during the planting and harvesting season each year, it conducts selective household interviews with bamboo growing farmers to understand their viewpoints and concerns; every three years it conducts full scale household interviews at communities from which it leases land; the Company also regularly talks to a cadre of forest management and protection officers from communities who act as a channel of communication with community members. The Company has supported community outreach activities such as greening activities by villagers. It also provides technical assistance to local bamboo farmers to help them adopt better growing techniques.

The following Company representative will be able to provide further information on the Project: Mr. YAN Pei He Guangxi Hwagain Group Co., Ltd Tel: +86-771-4750888 Fax: +86-771-4751302 Address: 22/F, Tower 1, Hang Yang International Center, 131, Min Zu Avenue, Nanning, Guangxi, China http://www.hwagain.com Hwagain will place an advertisement in a major newspaper in Nanning and Ganzhou to inform the public that results from IFC’s environmental and social review is available for access. It will also post the local language version of the environmental & social review summary (ESRS) and environmental & social action plan (ESAP) outside both its facilities and main plantation offices; and the same on its corporate website or provide a web-link to IFC’s disclosed ESRS and ESAP.