The Project was assessed against the 2006 Performance Standards on Social and Environmental Sustainability (“Performance Standards” or “PSs”).

Continuous assessment of potential, additional Performance Standard requirements will be part of the company’s responsibilities through PS1 and where identified, IFC must be promptly informed and appropriate mitigation agreed.

The applicability of PS1-4 and 6 is assumed for all of Nature’s activities during the life of the IFC financing, but with Performance Standards 5, 7 and 8 potentially applicable depending on the characteristics of each specific project. The applicability will be determined through the E&S assessment process (see PS1). Sections for PS5 and PS7 have been completed in this document in order to provide analysis of what is known of the Project at this time and to review the status of Nature’s existing operations and practices (e.g. in Peru and Yunnan).

The key environmental and social issues from the currently known plantation targets relate to land acquisition, including the potential for physical or economic displacement; land use change, including the potential to impact biodiversity or ecosystem services; development of supporting infrastructure (e.g. roads) and the potential to impact indigenous groups (referred to as ethnic minority groups in China). Key issues from Nature’s broader operations center on concession management (Peru and Yunnan) and related assurance processes; third party wood sourcing and related assurance processes and operational management with particular reference to occupational health and safety, pollution control and community outreach and development. The proposed use of IFC new financing and Nature’s underlying operations are considered to hold potential significant adverse social and/or environmental impacts that are diverse, irreversible or unprecedented and as such, the project has been classified as category A according to IFC’s 2006 Environmental and Social Review Procedure.

The Company has presented plans to address the key E&S issues and impacts listed in the prior section which, upon implementation of the specific agreed measures, will ensure that the proposed Project complies with Performance Standards and host country laws. Relevant World Bank Group environmental, health and safety (EHS) guidelines have also been used to benchmark current and future expected performance. Key mitigation measures are captured in the attached Environmental and Social Action Plan (ESAP).


PS1: Social and Environmental Assessment and Management System
IFC’s E&S supervision of its 2008 investment has been intensive, due to the scope, complexity and potential risk of Company operations. IFC has held E&S review meetings with Nature approximately every quarter since 2009. A core focus has been progress against sourcing targets for wood supply - this is addressed in the PS6 section. The 2008 E&S Action Plan (ESAP) had eleven specified actions, of which one became non-applicable (Jiangxi plantation). Seven of the remaining ten have been closed out and the remaining three are rolling targets or requirements that continue to be reviewed on a regular basis. Action #7 on the development of a Land Acquisition and Compensation Framework Plan (LACP) has been restated in the Action Plan for the proposed current investment: see action item PS1-2 (Defined Principles) and PS5 of this document.

E&S Assessment
Given the early stage of negotiations, no formal E&S assessment has yet been undertaken by Nature for the initial target plantations. Discussions with Nature’s legal team indicated that some E&S aspects are addressed in Nature’s initial due diligence for any proposed acquisition, including land or forest classification status, land use rights (LUR) and ownership structures and any unresolved ownership or compensation claims. IFC has recommended that where applicable, original environmental impact assessment (EIA) approvals from the relevant provincial Environmental Protection Bureau (EPB) are included in this initial legal due diligence list and integrated into the set of defined principles for acquisition of forest assets that Nature will develop and mandate through board approval. Further reference to these principles is made under PS5, PS6, PS7 and the ESAP (PS1-2).

An environmental and social impact assessment was included within the Forest Management Plan developed for the Nature America concession by its prior owners and included in its initial FSC certification assessment in 2008. Upon acquisition of the concession by Nature in 2009 extensive review of the Forest Management Plan was conducted. An Impact Assessment Manual, Forestry Operations Monitoring Requirements, and Reduced Impact Logging Specifications were included in 2010. The Nature America Supply Chain of Custody Procedures (2011) introduced other aspects of environmental assessment and mitigation to extraction operations A Study of High Conservation Value Forests (2010) has included a detailed census and interactive consultation with the five communities living proximate to the concession.

For any acquisition where IFC’s financing is utilized, Nature will ensure that the requirements of the Performance Standards are addressed within the assessment process, with a clear determination of what Performance Standards apply. For these, any gaps to requirements will be captured in action plans, with related budgets to support implementation. IFC will retain prior review rights of the E&S assessment documentation to ensure Performance Standard analysis is adequate and to support Nature in the management of the process and outcome.

E&S Management and Organization
IFC’s 2008 ESAP addresses several areas to formalize Nature’s E&S management programs, including baseline EHS reviews, development and implementation of EHS management plans and improved monitoring processes. The Company engaged consultants to assist with the baseline review, which was undertaken in 2009. The results of the review informed the final version of the management plan, completed in late 2009. This lays out responsibilities for the positions on the S&E Responsibility Leadership Team, strategic vision, action plan, implementation standards and budgets. The plan is subject to annual review and was last updated in April 2012. Current third party certifications in relation to E&S management comprise:

• - ISO 14001 certification for all production facilities in China (six owned, eight AMs)
• - FSC Chain of Custody (COC) certification for three production facilities in China
• - FSC COC certification for Nature Wood SAC, Nature America SAC, Universal Flooring, in Peru
• - FSC-FM certification for the Nature America concession, Peru.

In addition, the Global Forest Trade Network (GFTN) Trade Network prepares an annual audit report on wood sourcing. This reporting has documented Nature’s progress in enhancing its control of its wood supply chain. A summary of the most recent audit is appended to this ESRS.

Nature also uses the Five S framework to promote good housekeeping within its plants and OEMs across China. To improve the consistency of day-to-day EHS management, IFC recommended that Nature appoint a corporate sustainability coordinator. This role was created in 2010 and has improved the quality and timeliness of EHS monitoring and review. The relationship with former OEMs - now AMs - has changed since 2008, with a much closer alignment of management expectations than at the time of IFC’s initial investment. AM staff wear Nature uniforms and are bound by same management frameworks (see PS2 and PS6 for examples) as those employed at Nature’s own manufacturing sites. The visits made to AM plants as part of this review identified no striking difference in management attitude to EHS risk or management.

Management specifics (including organization capacity) for forest concessions and wood sourcing/GFTN audits are provided under PS6.

For any future forestry plantations or concessions acquired through a joint venture, Nature will require management control and as such, will insist on its E&S management and organization requirements being implemented.

Training
The company provides induction training for new staff, which includes a safety briefing. Fire drills are undertaken on a routine basis. The commitment to continuous improvement under ISO14001 drives additional training and awareness programs at the plant level as do corrective actions from accident investigations (see PS2 for further detail).

Consultation, Disclosure and Community Engagement
For the Project under the proposed new financing, consultation and disclosure will be part of the E&S assessment requirement described in a prior paragraph.

For existing assets, Nature’s China based production facilities are located on (light) industry estates where there are no obvious affected communities. For the Yunnan plantations, Nature used the services of a land consolidator in order to identify and structure the land parcels for the concessions, although it maintains a principle of paying affected landholders directly (see PS5). Due to the use of the consolidator however, a formal consultation record is not available. This deficiency is addressed by two items in the Action Plan related to this proposed investment (defined set of principles and procedures for acquisition of forest assets and stakeholder engagement plan and grievance mechanism). For the Ninglang concession, Nature’s Forestry Manager stated that he has regularly consulted with affected households in the development of the draft management plan, but wants to develop a stronger mechanism to foster greater community engagement and support (for all China forestry assets - present and future. At the time of this disclosure, the details for the Yingjiang concession are pending.

Nature has increased the number and scale of its operations in Peru since the original investment. Nature has now completed acquisition of the Nature America concession and the Nature Wood lumber mill. The Company has also significantly increased its purchase of wood from another integrated and FSC-certified concession and mill in Madre de Dios Province and has continued its relationship with a contractor which exports finished flooring products to North America and Europe (Universal Flooring). All of the Peru facilities have valid FSC FM/COC or COC certificates in place and the FSC assessments were reviewed. Corrective actions that were identified during 2011 assessment have since been closed out to the satisfaction of the respective certifying body and a meeting was held with one certifier to share impressions. As Nature is increasing its management role in forestry and milling operations it is important that the organization now engage a competent E&S Manager to ensure that it continues to provide important risk mitigation leadership across extraction and milling operations.

Monitoring and Reporting
Nature’s EHS reporting systems have improved significantly since 2008. At the owned plants and OEMs visited in China, comprehensive records of were available for all EHS data requested. Monitoring data is reviewed by plant management and priorities established for the forthcoming year (e.g. workplace noise reduction, waste sorting and segregation). Evidence of EHS improvements dictated by monitoring and review outcomes was seen at Kunshan and Zhangjiagang, where wood dust boilers (with heat recovery units) had been installed to replace coal fired boilers. Nature’s reporting to IFC has also followed a commensurate improvement. Third party monitoring is provided through the certifications listed in the prior section. Nature management reported that no major non-conformities have been raised via ISO 14001 surveillance audits at owned plants or OEMs. Available records and management guidance on EHS monitoring requirements, and interviews with both regulators and independent certifying bodies in Peru indicate that the company maintains an effective continuous improvement cycle capable of addressing E&S risks as they evolve.

PS2: Labor and Working Conditions
Nature’s China operations have approximately 2,200 employees, of which 35% are women. Workers for AMs are provided with the same terms of employment and contracts and those working in owned facilities. There is also no distinction made between local and migrant labor. At the Ninglang plantation in Yunnan, efforts have been made to recruit from the local Yi population - as of the date of this disclosure the figure was 18, including the Concession Manager.

Contracts are based on the Chinese Labor Law requirements, which specify working hours, maximum overtime allowances and other core labor standards. All workers are provided with medical and social security coverage and options to join saving schemes (linked to government incentives aimed at homebuyers). Salaries are benchmarked against comparable local industries and pegged higher than the average but in spite of such efforts, Plant Managers report employee turnover as an ongoing challenge. This is put down to increasing competition from service or high-tech jobs which involve less physical labor. Staff opinion/suggestion boxes are present in plants. These are highlighted in induction training and submissions are reviewed by a designated member of management team, who then assigns the responsibility for follow up.

Plants operate on either a single or double shift system of nine hours each, six days a week. Staff is entitled to a one hour lunch break, with shorter (20 minute) breaks during the shift. The company recognizes public holidays and staff can apply for additional leave during the year. Production workers work in small teams of 4-5 and are paid according to production volumes (recorded by area), calculated on a shift basis. An hourly rate is provided when there is no production. A quality premium also paid to who workers are rated above a monthly mean score.

HR Policy and Manual
Since 2008, Nature has developed an HR Manual that specifies all of the labor and working conditions provisions required by PS2. The same Manual is used by owned facilities and AMs. It includes:

• - ensuring compliance with national labor and employment laws
• - establishing, maintaining and improving employee-management relations
• - promoting fair treatment, non-discrimination and equal opportunity of workers
• - avoiding harmful child labor or forced labor (Nature’s minimum hiring age is 16)
• - promoting safe and healthy working conditions and
• - protecting and promoting the health of workers.

Nature operations in Peru are guided by an Employment and Social Conduct Policy (2011) that describes the context and terms of employment and refers to Peruvian labor laws which are annually reviewed by both Labor Department auditors and independent auditors accredited by FSC. Approximately 35 employees worked a single shift at the Nature Wood sawmill and the Nature America concession has transitioned from contractor extraction to owned in 2012 which now employs roughly 60 seasonal workers and approximately 30 full-time staff for administrative and milling operations. No accidents occurred at either of Nature’s owned locations during 2011.

As Nature will extend these management practices to any manufacturing, plantation or assets that it acquires or where it has management control.

Retrenchment
At the time of this disclosure, Nature has no need for retrenchment planning, but its HR Manual addresses this eventuality. The Company will develop a retrenchment plan framework document, applicable to all owned forestry operations and processing facilities.

Worker Accommodation
For production facilities in the Pearl River Delta region (where migrant labor was historically the most evident), accommodation is also provided at a number of sites. This comprises a mix of shared rooms, family rooms and dormitories. One unit in Shunde was visited and was well maintained, with adequate utilities (light, electricity, water) and facilities (bathrooms, common areas). Workers contribute between 0% and 35% of the accommodation cost, depending on location and type of accommodation. Approximately 700 workers currently use the company’s accommodation. Worker accommodations are not provided for operating facilities in Peru except for seasonal forestry workers. Adequacy of accommodation will be reviewed during the up-coming FSC Annual Assessment.

Occupational Health and Safety
All new staff undergo a health check and health and safety is a component of the induction training. Workers in higher risk areas (e.g. coating line technicians, sanding areas) are subject to routine testing. Workers are provided with company work overalls and personal protective equipment (PPE), including helmet, mask, gloves, safety glasses and ear plugs. Since IFC’s first investment in 2008, the improvement in provision and use of PPE is marked, as is the consistent use of hazard and warning signage; provision of machine guarding and emergency stop buttons; upgrade of equipment to intrinsically safer designs and upgrades to local exhaust ventilation (LEV) to remove dust and other pollutants from the workplace. At the three production facilities visited in China, only a small number of opportunities for improvement were observed of which the most obvious were the lack of safety footwear and the need to monitor the impact of diesel forklift emissions within manufacturing or warehouse areas. All dust collection systems seen were equipped with spark detectors, drenching systems and explosion relief panels. Appropriate use of PPE was generally observed in Peru operations although at least two incidents of improper hearing protection were observed and disabled signals on forklifts and improper storage of sawdust created other preventable hazards.

OHS monitoring and accident recorded have also improved markedly since 2008. All Nature facilities and OEMs record legally mandatory incidents (greater than 105 lost work days) but also what Nature defines as major incidents (medical bill above 3000 RMB) and minor incidents (medical bill between 300-3000 RMB). OHS monitoring is routinely undertaken and includes dust, formaldehyde and noise.

In 2011, a total of 41 lost time accidents were recorded across Chinese operations. At the plants visited, Kunshan received an award for zero injuries in 2011 and Zhengjiagang recorded one major incident (laceration injury) and seven minor incidents (cuts, finger and toe crush injuries). While accident analysis and preventative action identification does occur, the recommendations are quite generic (e.g. ‘more training’) and therefore Nature will develop a more detailed evaluation process, including trend analysis (e.g. a variety of incidents initiated by the same root cause such as lack of effective log out, tag out procedures). This is captured in the Action Plan.

Nature’s own operations in Peru had made notable improvements in workplace safety although operations in the forestry concession were not observed due to seasonal closure. Previous visits to one of Nature’s primary suppliers indicated appropriate in-forest lodging which was verified by a 2011 FSC assessment. Several observations of poor lighting, open machinery, and dangerous stacking of logs were observed at a primary supplier’s milling operations and a lack of proper security equipment for off-road vehicles noted at several other locations. As Nature is assuming more direct management control for previously contracted operations, increased attention to worker safety will be necessary. To this end, it will engage a competent professional to conduct an OHS assessment of Nature-owned companies and primary suppliers, and based on assessment results, develop an action plan and schedule and budget to implement it.

PS3: Pollution Prevention and Abatement
The principal emissions from manufacturing operations in China are wood dust and chemical emissions from the sanding (solid and engineered flooring), cutting and grooving (all flooring), laminating (laminate flooring) and coating (all flooring). The EHS baseline and management plan work described in the PS1 section has resulted in improved pollution control, particularly with respect to dust, which at the Chinese plants visited was effectively controlled by LEV extraction, cyclone and a direct feed option into a wood burning boiler. Excess dust and other wood scrap are sold to third parties.

Emissions from laminating and coating processes are vented to atmosphere – either via roof vents or LEV exhaust outlets. Routine monitoring of the boiler stack emissions, the wastewater discharge and ambient levels of volatile organic compounds (VOCs) indicate overall compliance with WBG limits, although with one or two outlier facilities where follow up review (and if necessary, additional mitigation) is required. Coating chemicals (lacquer, UV coating, ink) are sourced in standard drums, which are decanted or siphoned at point of use. Since 2008, chemical and solid waste storage has been upgraded and at the Chinese plants visits, they are served by dedicated storage rooms, adequately ventilated with containment and intrinsically safe lighting. Chemical storage at point-of-use has also improved.

For the sawmill operations in Peru, the principal emissions are particulates from milling, smoke from kiln and boiler operations, and VOCs from diesel power generators. One primary supplier in Peru continues to incinerate wood waste in the absence of an off-taker and kiln-drying operations. Consideration of “ganging” multiple saw mills into a combined heat-power facility was discussed. Management of VOCs at a finished flooring contractor in Peru using UV-cured coatings includes increased negative airflow, recently installed hoods and automated calibration of spray guns. Some improper storage of fuel and lubricants and disposal of solvents was noted at a primary supplier facility.

Emergency Preparedness and Response
As committed to in 2008, Nature has mandated the development of an emergency preparedness and response plan to serve each facilities and AM. Visible precautions noted during the visits to Chinese facilities included spark detection and automatic water dousing systems for the dust handling equipment; sprinklers in production and warehouse structures; use of intrinsically safe lighting and regular fire and other emergency drills.

Nature-owned operations in Peru had appropriate signage and identified first responders and location of medical facilities. However, the dust detection and fire fighting systems at one owned mill were inadequate and require upgrading to prevent explosions and the potential for catastrophic fire. Primary suppliers were observed to have increased attention to prevention and through additions to operating manuals although evidence of training-in procedures was not available nor was any indication of actual drill execution.

Greenhouse Gas Emissions
The total GHG emissions of the Project are estimated at 96,000 tons CO2-equivalent per year, resulting from part of the 20,000ha being converted from pine forests to managed plantations, from the annual anticipated removal of merchantable wood biomass from plantation sites and from processing energy use.

In 2010, Nature introduced a zero carbon laminating flooring product, where the emissions from its manufacture are offset against carbon credits. TUV provided the assurance process (against ISO14064 for greenhouse gas reporting), with a mean CO2-equivalent emission per m2 of 10kg (the actual figure varies slightly from year to year). Introduced for the Shanghai Expo, the product is sold without a price premium. The 2010 carbon credit was 38,000mt.

PS4: Community Health, Safety and Security
For operations in China, Nature deploys security staff in a manner consistent with other manufacturing companies (e.g. to control vehicle movements on and off site and as act night-watchmen. Their presence and role is therefore considered appropriate, proportionate and compliant with the security personnel requirements of PS4.

For the Yunnan Ninglang plantation, a policy of open access has been implemented, allowing non timber forest product (NTFP) collection (mushrooms, firewood, grazing, bees, traditional medicinal herbs) but with restrictions on fire setting. Members of the local population have been hired to work as forest rangers (see PS2).

Ensuring that planting or harvesting regimes do not exacerbate natural hazards (erosion, flood, landslide) will be addressed in the management plan for the target concessions (and the existing ones in Yunnan and Peru). The commitment to third party certification - FSC or similar - also ensures this issue will be addressed.

In Peru access and perimeter security to milling operations are performed by well-organized contractors who evidenced training and proper equipment. Security around Nature’s concession is regulated by controlled access points for vehicles and with the support of peripheral communities who are paid to patrol concession boundaries. Post-harvest hunting within concessions is prohibited and was reviewed during the FSC process in 2011 and found to be acceptable. All five communities proximate to the Nature America concession identified hunting as a principal economic activity and the Company is working through its Community Engagement Plan (Plan de Relacionamiento Comunitario, 2011) and its Forest Conservation Plan (Areas de la concession forestal para realizar acciones de conservacion y proteccion de la empresa Nature America, 2010) to reduce post-harvest hunting pressure (see HCVF discussion in PS6, below).

PS5: Land Acquisition and Involuntary Resettlement
An Action Plan item from IFC’s original 2008 investment was the development and implementation of a land acquisition and compensation framework plan (LACP) although as indicated in the PS1 section, it is considered by IFC to be insufficiently detailed to capture the full range of issues relevant to plantation acquisition, including the changes to national law regarding forest land user rights and forest tenure reform. The updated framework will be integrated into the defined principles for acquisition of forest assets that Nature will develop and mandate through board approval and the overall S&E process required to map any target acquisition against all Performance Standards, identify gaps and address these through action plans, with related budgets to support implementation. IFC will retain prior review rights for such assessments - see PS1 and the ESAP for further detail.

The initial phase of the Project comprises eucalyptus plantations across several land parcels. Discussions to date indicate that the land use rights (LUR) were first negotiated with farmers in 2002 and a sample land use rights agreement was provided for review. It indicated a collective agreement between one village for 350ha over 30 years (2003-2032) and was signed by approximately 30 persons. Such collective agreements were replaced with individual contracts as part of the forest tenure reform in China.

Compensation was a mix of lump sum payment and annual leasing fee, depending on the individuals’ preferences. For the latter, an initial fee was set for 2003-2017, with a 20% increment for 2018-2032. It was further reported that no individual was required to physically relocate from the plantation area, as an earlier government policy had mandated relocation into more urbanized areas with utilities, access to schooling and the like. It was acknowledged that a small number of compensation disputes remain unresolved - primarily related to individuals who sold early and saw that subsequent offers per hectare were higher.

The agreement described above is a sample illustration: for any acquisition, Nature will verify (1) the land use rights status for all land parcels; (2) involvement of middlemen and where present, the layer(s) of underlying contracts, and the lease payment rate at each layer; (3) the legal validity of all layers of contracts and land use right certificates as per the Land Management Law, related regulations and directives and the Property Law; (4) the timber ownership and use rights; (5) whether physical displacement took place as a result of the agreement; (6) the extent of economic displacement if any; (7) basic analysis of local livelihoods and how they may be affected by the land acquisition; (8) whether any vulnerable groups were impacted; (9) whether any indigenous groups (ethnic minorities) were impacted; (10) how the compensation price was set; (11) the extent of consultation and the transparency of such (e.g documented records, including the process for the ‘two-thirds majority voting’ required for a village to agree to transfer land use rights); (12) whether there are an unresolved disputes (and root cause of such) and (13) any other requirements as defined by PS5 or Chinese law. Where gaps or deficiencies are identified, these will be addressed through action plans, with related budgets developed before each land lease/transfer agreement is signed to support implementation.

As described in the E&S Assessment section of PS1, discussions with Nature’s legal team indicated that some E&S aspects are addressed in their initial due diligence for any proposed acquisition, including land or forest classification status, land use rights and ownership structures and any unresolved ownership or compensation claims.

For Nature’s acquisition of plantation assets in Yunnan, it used the services of a land consolidator (see Consultation, Disclosure and Community Engagement section of PS1). While this is common practice, there is precedent for consolidators making false promises to land/forest use rights holders in order to secure their ‘sell’ agreement. Nature’s management is aware of this and will structure its oversight of any commissioned land consolidator accordingly, as part of its updated LACP. Nature also maintains a principle of paying affected landholders directly.

At Ninglang County in Yunnan, under the forest tenure reform scheme, approximately 100,000ha of forest land (i.e. 50% of what could potentially be transferred to third parties) have completed or are in the process of completing LUR transfers from village collectives to farmers, then to third parties, involving about 7,600 households. Concerns about local communities being sold short prompted the County Governor to establish a minimum lease rate (2850 RMB/ha for a 20 year lease, equivalent to 142 RMB/ha per annum). For Nature’s concession of 4,000ha, this was the price paid, either as annual lease or lump sum. 632 individuals entered contracts with Nature, which run from the year 2009 to 2074. The concession is consolidated from 25 specific land parcels. No individuals or householders were required to physically locate as a result of the purchase. From the consultations Nature local forestry management team has had with the affected landholders, the opportunity for a new income stream was welcomed, although livelihoods are also closely tied to the forests and in particular, collection of NTFPs (including resin tapping). Nature has therefore adopted and implemented a policy of open access, allowing for NTFP collection but with restrictions on fire setting. Continued access once timber extraction commences will be a key aspect of the forest management plan. Members of the local population have been hired to work as forest rangers (see PS2).

For the Yingjiang concession, the purchase was completed shortly before the time of this disclosure and therefore full details of its composition and compensation are pending. For both Yunnan concessions and as a condition of IFC’s new financing, Nature will provide an S&E assessment that includes mapping against the provisions of PS5. Much of this can be achieved through the FSC-FM pre-assessment that IFC requires for the Yunnan assets (and for any future plantation/concession acquisitions), as Principles 2, 3 and 4 of the Standard address such issues.

Under Peruvian law, indigenous and established communities are granted continued access to traditional and customary (non-commercial) land-uses on lands set-aside for forest production. However, hunting and fishing are prohibited on those areas where extraction has taken place for a five year period. During its delimitation of High Conservation Value Forests (HCVF), Nature America identified those areas which were of significant economic or cultural value to the five adjacent communities (3 to 20 kilometers from boundaries). Denoted as HCV No. 4 according to the HCVNet methodology, which is employed by FSC and its accredited certifying bodies, these areas have been set-aside as buffer zones for or non-extraction purposes.

PS6: Biodiversity Conservation and Sustainable Management of Living Natural Resources
Target plantations for the Project
For the Project, the E&S assessment criteria described in PS1 will apply. In addition, Nature will also (1) undertake FSC-FM pre-assessments, which can be integrated into the defined principles for acquisition of forest assets that Nature will develop and mandate through board approval and the overall S&E process required to map any target acquisition against all Performance Standards, identify gaps and address these through action plans, with related budgets to support implementation. IFC will retain prior review rights for such assessments - see PS1 and the ESAP for further detail. Such an approach will help Nature to avoid concession or plantation opportunities that are heavily compromised with respect to their potential for FSC or equivalent third party certifications. For viable assets, it will also help Nature select a target date for obtaining FSC-FM or equivalent certification, with 36 months set as the maximum from the date Nature takes management control. [While the focus of this investment is plantation assets in China, this commitment will hold for any forest acquisition Nature makes globally.

For the initial target plantation, the entire forest is reported to be classified as commercial forest (i.e. there are no conservation forest designations within the footprint). A preliminary biodiversity screening of the concession area indicates no legally protected areas or priority sites for biodiversity in its immediate vicinity. The land parcel visited was situated on a moderately steep slope that was reported to be uncultivated/scrub land prior to the original seeding 15-20 years ago. Forestry and forest products are primary enterprises in the area, together with NTFP (primarily mushrooms) and tea cultivation. While eucalyptus has dominated recent plantings, plantations of native hardwood (oak) and softwood (pine) forests are also evident, dating back to the 1950s. A 2005 report for the World Bank and Guangxi Forestry Bureau estimated forests to cover close to 60% of total land area of the province, with 90% of it held under collective (now individual) land use rights. The eucalyptus planted in the target plantation comprises various clones propagated within China. No genetically modified (GMO) eucalyptus has been planted within the target concession area and Nature will avoid such plantations, given their preclusion to FSC-FM certification or equivalent.

Yunnan
The Yunnan concessions are both mature commercial forests, seeded primarily with Chinese pine species between the 1960s-1970s. 91% of the total area of the Ninglang concession is considered harvestable by Nature’s forestry management team. The percentage for the Yingjiang concession is estimated at 97% and it has a higher percentage of mature standing timber, including oak, birch and alder. A preliminary biodiversity screening of concession areas indicate no legally protected areas or priority sites for biodiversity in their immediate vicinity. Both concessions are at pre-harvest status, as Nature’s forest management team completes assessments and forest management plans, including an assessment (for Ninglang) against FSC-FM principles. Two of the most challenging aspects identified by the Nature Forestry Manager relate to capacity development and specifically, training of local workers and maintaining skills and competencies. IFC has recommended that Nature establish a small, dedicated FSC unit within its own organization (reporting to the Senior Manager of the Forestry Department). This will allow Nature to develop its own internal capacity for managing assets to FSC or equivalent and standards and in doing so, will make capacity building of third parties easier.

A summary gap analysis (for Ninglang) against FSC-FM principles based on site visit findings was conducted in April 2010, concluding that substantive preparatory work was needed at the time before the asset would be ready for pre-assessment. The gap analysis also listed a number of recommended follow-up actions. Nature has entered into negotiations with an accredited FSC-FM certifier for a five year service package, which would include an initial, formal assessment of the Ninglang and Yingjiang assets. The Company will ensure that pre-assessment of the Ninglang and Yingjiang assets is undertaken so as to provide the basis for these assets to progress towards FSC-FM certification.

Peru
The Company began purchasing tropical hardwoods from Peru in 2001 and began researching the possibility of purchasing a concession in 2005. The Company acquired an FSC-certified concession in 2009 (Nature America) outside Yurimaguas in Loretto Province. The 46,347 ha concession is managed on a 40 year cutting cycle intervening annually on roughly 1,000 ha and provides provides logs to a contracted saw mill in Yurimaguas. The eastern edge of the concession is continguous with two million ha Pacaya Samiria Wildlife Reserve and nearly 2,000 ha set aside as a high conservation value forest and acts as a buffer zone to this important Reserve. The concession management plan and annual harvesting plans have been reviewed and approved by the National Environment and Natural Resources Agency (INRENA) and the Forestry Regulatory Authority (OSINFOR). The concession has appropriately detailed management measures and specific procedures for low-impact logging, environmental monitoring, high conservation value planning, community engagement and conflict resolution. The concession was certified in 2008 by its prior owner to the FSC Principles and Criteria in 2008 by Rainforest Alliance/SmartWood and has been assessed annually ever since. While different non-conformities have been identified during recent assessments the Company indicates that all non-conformities identified in the 2011 have been closed and another assessment is schedule for July 2012.

Most of the logs from its concession are milled by a contractor (Nature America SAC, Yurimaguas) which are then exported to China or milled into finished solid flooring at a contractor, Universal Flooring, in Lima. In addition to the concession that it owns it also purchases logs from an integrated concession and milling called Maderyja in Madre de Dios Province. This entity, which is FSC FM/COC certified and reviewed during appraisal, sells more than half of its lumber to Nature’s own Nature Wood SAC mill located in Puerto Maldonado. Subsequently Nature Wood forwards most of its dressed lumber to Universal Flooring for finishing and export. Nature anticipates increasing its purchasing and management role within the Maderyja concession and to assist this entity to improve its supply chain and quality assurance.

Wood Sourcing and Supply Chain
Nature joined the Global Forest Trade Network (GFTN) in 2005 and by the time of IFC’s 2008 investment, had been through three wood supply audits and established formal targets, specifically:

• - elimination of unknown wood sources for owned facilities by end 2009 and for AMs, by end 2012
• - 100% legal supply of wood for owned facilities by end 2011 and for AMs, by end 2014
• - 20% or greater of certified wood by end 2010

GFTN has continued to undertake annual audits: the 2011 report represented the sixth in the series. The sixth (October 2011) audit specified that for owned facilities:

• - no unknown wood sources (this target having been first met in 2010);
• - 90% legal source
• - 5% known source; and
• - 5% certified source.

For AMs, the 2011 data are:
- 5% unknown source
• - 48% legal source; and
• - 47% known source

A summary of the report is appended to this document. All of Nature’s wood meets Chinese regulatory requirements for harvesting (domestic) or importation (foreign). The GFTN definition of ‘unknown’ and ‘known’ therefore does not reflect illegality, but rather the size of the gap between minimal legal requirements and compliance with criteria for Verified Legal Origin or similar internationally recognized standards for wood traceability.

In terms of total volumes, the GFTN report indicates that Nature imports approximately 110,000m3 of hardwoods from more than 20 countries both tropical and temperate. About 10% of this volume comes from Peru where Nature has now established wholly-owned and contracted concession and milling operations which (see above). Other tropical countries of significance include Brazil, Gabon, PNG, and the Solomon Islands and temperate hardwoods come largely from Russia and the United States. Nature has significantly reduced the number of species and sources of hardwoods over the past five years and now imports lumber from a short list of countries which can provide verified legal origin and document sustainable management practices.

While the unknown wood elimination target for owned facilities was missed by one year, the audit results nevertheless indicate the commitment to - and success of - Nature’s program to verify and adapt its wood supply chain. At the time of Nature’s initial baseline audit in 2006, 98% of its timber was categorized as unknown. A number of initiatives have contributed to the transformation of Nature’s sourcing practices, including the creation of a dedicated wood supply purchasing group (an ESAP item under IFC’s original financing), the tightening of wood purchase criteria and a deliberate strategy to promote flooring products where the sourcing of verified legal or certified wood was easier to achieve (specifically red and white oak sourced from the USA). The latter strategy has been extended to the promotion of products that provide alternatives to traditional floorings based on rare or unsustainably harvested species.

As committed to at the time of IFC’s first investment, Nature will publicly disclose a summary of each progress review. The summary will also identify the principal actions Nature is implementing in response to the findings of each review. The GFTN audits have emphasized the next step for Nature: a full chain of custody process for wood supply, mapping and documenting from origin to receipt. Successful implementation of chain of custody would allow Nature to meet ‘Verified Legal Origin‘ (VLO) or an equivalent standard. A commitment to migrate to such an internationally recognized standard is included in the ESAP for this investment. The increased visibility of this type of certification will also contribute more directly to Nature’s brand and marketing.

PS7: Indigenous Peoples
Guangxi is designated an Autonomous Region to provide administrative recognition to the Zhuang, the largest of the 55 ethnic minority groups in China with an estimated population of 18 million. The Yao, Miao, Dong and Shui are also represented in Guangxi. The exact composition of the populations affected or potentially affected by the target plantations is unknown at this stage but such analysis will be required as part of the E&S Assessment requirement described under PS1. As stated in PS6, over 90% of Guangxi’s forest land is held under collective or individual land titles and therefore the likelihood of target plantations impacting traditional or customary lands is considered unlikely. As such, the PS7 requirement for good faith negotiation is also unlikely to be invoked.

In Yunnan, the ownership of land use rights is similar (traditional or customary lands unlikely to be encountered) but the composition of ethnic minorities differs, with the Yi representing 11% of the Province’s total population. The Bai, Hani, Zuang, Dai and Miao are also present. In the area of the Ninglang and Yingjiang concession, the majority population is Yi. As described in PS1, PS5 and the E&S Action Plan, Nature will develop (1) a stakeholder engagement plan; (2) an assessment, by an externally qualified consultant, of the customs / practices / norms of local ethnic minorities in the immediate project area, which are related to local forests and forest resources) and (3) an operational grievance mechanism to serve these concession areas. The results of the assessment under (2) will be fully incorporated into the SEP and grievance mechanism to ensure that they are culturally sensitive; where the assessment finds any aspects of local ethnic minority cultures adversely affected by the project, the Company will take feasible actions to minimize those impacts, after free, prior and informed consultation with local ethnic communities. The Company will also communicate the SEP, the assessment results, and the grievance mechanism to local ethnic minority communities in a cultural appropriate manner. The policy of ‘open access’ to allow for continued collection of NTFPs is also a critical part of engagement with the affected Yi, as part of a broader program to ensure their livelihoods are maintained or improved.

Peru
There are five indigenous communities that are located within 5-20 kilometers from the Nature America concession. These communities range from nine to 80 families and approximately 600 persons. After acquiring the concession, and part of its HCVF identification process, Nature conducted consultations with each group to ascertain their interests and potential impacts of the continued concession operations. The communities, which are 5 to 20 kilometers from the concession described their uses and needs which were taken into account when Nature established its conservation areas. Members of these communities have been employed by the concession management contractor and other members engaged in marking and patrolling concession boundaries. The Company reported good relationships with these communities: this was confirmed in the 2011 FSC assessment.

Maderyja, the Nature Wood Peru supplier in Madre de Dios, has formed a collaborative partnership with the neighbouring indigenous community of Belgica which borders on the Acre River outside Inapare. “Belgica” has authorized control over 53,400 ha of forest between several concessions and the Acre River outside Inapare. With support from Maderyja and others Belgica joined with a neighboring community to create ADECOMP which was certified to the FSC Group Standard by SmartWood in 2010. However, ADECOMP as a group, was not able to close several major non-conformities identified in prior assessments and was decertified in early 2012. Review of the FSC assessments, and interviews with Belgica members and conservation organizations familiar with case, indicated that Belgica was not the primary cause of de-certification which could be reinstated with proper support.

Nature, together with the China Green Fund, has planted over 110,000ha of ‘ecological forest’ within China for recreational and conservation purposes. The forests also provide a carbon sink of approximately 2.5mln metric tonnes per annum of carbon dioxide equivalent.

Nature also supports a number of initiatives to serve communities close to production facilities, including a disease prevention program in Guangdong and provisional of educational scholarships. The Nature website provides further details of corporate social responsibility initiatives.

Review of available documentation and interviews with affected communities, regulators and NGOs in Peru indicated that community engagement in areas adjacent to concessions was satisfactory. The basic procedures for community engagement have been largely established, and consultation in Yurimaguas appears to be effective according to FSC assessments. It was observed that there remain opportunities for more active training of both staff and contractors and prospects for building organization and technical competencies for sustainable forestry in some communities which may be indirectly impacted by extraction.

To be determined once target assets have been confirmed. In the interim, enquiries can be addressed to:
Raymond Fang
Secretary to Chairman
TEL: +86 757 22916330
FAX: +86 757 22916337
ADDRESS: No.8 Longpan West Road New District, Shunde District, Foshan, Guangdong Province, PR China
http://www.nature-cn.cn

Nature will place a local language advertisement in a major newspaper in Kunming, Ninglang and Yingjiang to inform the public that results from IFC’s environmental and social review are available for access. It will post the local language version of the ESRS and ESAP: (a) in a conspicuous location (e.g. public library or community center) at the Ninglang county, Yingjiang county, and the townships closest to the Ninglang and Yingjiang plantations; and (b) on Nature’s corporate website or provide a web-link to IFC’s disclosed ESRS and ESAP. A summary of the GFTN annual audit reports will also be posted on the Company’s website.