While all Performance Standards are applicable to this investment, IFCs 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. If IFCs investment proceeds, IFC will periodically review the the project’s ongoing compliance with the Performance Standards

PS 1 – Assessment and Management of Environmental and Social Risks and Impacts
PS 2 - Labor and working conditions
PS 3 - Resource Efficiency and Pollution Prevention
PS 4 – Community Health, Safety and Security
PS 6 – Biodiversity Conservation and Sustainable Management of Living Natural Resources
If IFC’s investment proceeds, IFC will periodically review the the project’s ongoing compliance with the Performance Standards

This project has been categorized as a B project in accordance with IFC’s Environmental and Social Sustainability Policy. This is a repeat IFC client who has demonstrated significant commitment and resources to successfully address environmental and social issues identified in previous investments made in 2004 (#22165) and 2006 (#25299). The proposed project is focused on improving and expanding manufacturing capacity. All activities associated with wood supply and manufacturing were reviewed during appraisal and determined to have localized risks and impacts which can be avoided through proactive E&S management or mitigation measures that the Company has successfully implemented during the prior IFC investments.
The Company has provided clear demonstration of its compliance with applicable Chinese regulations, commitment to meeting IFC’s Performance Standards, and dedication to using forestry and wood product industry best practices. The Company has made substantial progress in reducing EHS risks through significant investments in human resources and equipment. The Company has established and certified its manufacturing facilities to several internationally-recognized and externally-verified management systems the ISO 14001 standard for environmental management, and the OHSAS 18001 standard for occupational health and safety, and the Forest Stewardships Council’s Chain of Custody. The Environmental and Social Review Summary (ESRS) and E&S Action Plan (ESAP) describe the results of the appraisal and the additional agreed upon E&S items to further advance the Company’s environmental and social performance.
The proposed investment is focused on improving wood manufacturing within established industrial zones and PS5 – Land Acqusition and Resettlement was not considered to relevant to the proposed project. The Company does not anticipate further acquisition of new forest land but it will establish a land screening and risk assessment procedure to verify compliance with applicable Chinese forest land use requirements and the IFC Performance Standards should it reengage in forest land acquisition.
There are at least 10 ethnic minority populations in the Guangxi Region and areas around Nanning including large communities of Zhuang. Because these populations have assimilated into Han Chinese culture, to a large extent, it was determined that the Company’s industrial operations do not pose significant adverse impacts on local ethnic minorities and PS7 – Indigenous Peoples does not apply to this project. Similarly, PS8 – Cultural Heritage was determined not to be applicable within the targeted industrial sites.

IFC's appraisal considered the environmental and social management planning process and documentation for the project and gaps, if any, between these and IFCs requirements. Where necessary, corrective measures, intended to close these gaps within a reasonable period of time, are summarized in the paragraphs that follow and (if applicable) in an agreed Environmental and Social Action Plan (ESAP). Through the implementation of these measures, the project is expected to be designed and operated in accordance with Performance Standards objectives.

Environmental Policy, Management Systems and Assessment of Risks. The Company has adopted an integrated corporate environment management, occupational health and safety, and quality assurance management systems. The company has established a sustainability policy and sets environmental improvement targets and it conducts routine internal audits as determined by its Board’s Audit Committee. It supplements these systems with external certification audits to the ISO 9001, ISO 14001 and OHSAS 18001 standards which were verified. This integrated “QEO” management system is operationally translated through adoption of management programs and standard operating procedures (SOPs) which are customized to each manufacturing facilities’ operating conditions. All Fenglin manufacturing operations operate under Chain of Custody requirements established by the Forest Stewardship Council (FSC-COC). Environmental Impact Assessments (EIAs) have been conducted by the State Environmental Agency at each facility which was reviewed by IFC during appraisal. Annual Operating Permits are issued by municipal authorities who are responsible, based on permits’ Terms and Conditions, for conducting annual environment, health and safety reviews which were available for review at each facility.

Management Programs, Capacity and Monitoring - The EHS procedures, operating records, and established environmental requirements for the two most recently built plants, which are the target for this investment, were reviewed in detail. These new facilities, and review of previous supervision documentation, indicate that the Group has adopted appropriate management measures and mitigation options at each processing facility. `Each plant has a designated production officer responsible for day to day management of the EHS risks who reports to the plant manager. Corporate review of environment and safety performance is managed through various functions: safety incidents are reported to the human resources division, management of internal auditing is handled by the audit committee, and external review of EHS compliance and third party auditing is managed by the Research & Development Division. Some Key Performance Indicators (KPIs) are established and monitored at different by shift, daily at some plants (e.g. noise at chipper, PM10 at stack) established. Each plant is responsible for purchasing its wood fiber requirements from suppliers who aggregate an extensive network of residual collection from small plywood peeling and lumber mills. Although the EHS programs and practices at the plant level were observed to be effective, it was determined that upward reporting and prioritization of risks could be improved through standardization and more consistent analysis across plants. It was also observed that the integrated QEMS system has not yet been fully incorporated into the Company’s forestry practices. In order to increase the efficacy of these EHS programs, and to identify common and cr
oss cutting areas for E&S risk reduction, the company will engage a qualified Environmental & Social Manager. The EHS Manager will report to the General Manager to improve coordination of sustainability efforts, review environmental and social risks as a business function, and help to standardize reporting as the Company expands its manufacturing and wood supply operations (ESAP 1.1)

Stakeholder Engagement, Communications and Planning, – Initial engagement with local stakeholders has been achieved through close coordination with municipal and provincial government agencies at each of the three original processing facilities. The new facilities, to be supported during the project, are located in structured industrial zones which have responsibility for water and power and representing tenants to the public at large. That said, the Group routinely supports investments in schools, recreational activities, and physical infrastructure improvements in communities proximate to facilities. Most of these types of engagements are ad hoc and appropriately driven by the plant manager or district forest supervisor. As the company further expands its operations it will need to step up efforts in more strategic community involvement to improve the consistency of support and the ability to aggregate and report its stakeholder engagement benefits.

Grievance Procedures - Each mill also has some form of established grievance procedure for receiving and responding to complaints from stakeholders through a designated contact and information was available at the entry to each facility. Registration of such complaints is decentralized and appropriately managed by the plant managers. During the recent commissioning of the new Mingyang plant a neighboring university filed a complaint about dust and steam discharge. The plant manager provided detailed responses, conducted direct communications with industry zone representatives and municipal environmental authorities, and guided tours for some 200 interested parties through the new facility. In Huizhou, the company recently acquired an existing particleboard plant. At this site, the plant manager indicated that main complaints from local residents have been related to noise levels and odors which they have addressed through procurement of a new rotary dryer, and improved monitoring to determine noise abatement priorities and shifts in wood yard organization. With the ramp-up in capacity, and increasing attention to brand awareness and corporate responsibility, the real costs of EHS issues will be more systematically assembled and reviewed to strengthen the Group’s prevention of incidents and improve responsiveness as part of the proposed investment. The company will develop and maintain procedure for external communications across all plants that will be able to register and track external communications and assess the risks and responses as necessary. The grievance mechanism shall ensure that grievances from a
ffected communities and external communications from other stakeholders are responded to and managed appropriately. (ESAP 1.2)

Management Programs and Emergency Response - Each plant has prepared an emergency response plan for primary risks (fire and seismic events) which is formally trained in and tested at least annually. The Company has developed a COC system that allows it to “track and trade” sustainability claims if, and when, the wood fiber is sourced from FSC-certified forests. The Company has the procedures and systems at its manufacturing facilities to pull certified product through but it currently lacks the documentation of a fragmented and residue-based wood supply chain to be able prove this competitive advantage. It is currently testing its capacity to meet international standards (see PS6, below). With awakening interest in China for sustainable products, and increasing attention to wood legality provisions established in the new EU Timber Regulation and the US Lacey Act, the ability to document wood sourcing is becoming an important sequitur for internationally-traded wood products including furniture and flooring. To improve this system the Group will develop and implement a reasonable system to verify legal origin and compliance of its primary wood suppliers. To the extent practical this system will meet established global requirements including identification of geographic source, evidence of legal right of access to fiber resource, and evidence of forest management practices where necessary. The system will be codified, effectively transferred to primary suppliers, and routinely monitored for effectiveness (ESAP 1.3)

Human Resources Policies and Procedures – The company employees approximately 1100 employees with nearly 90% of the total being allocated across its five MDF and PB manufacturing facilities. Roughly 30% of the workforces are women concentrated in the administrative functions and finishing lines. Human resources policies and procedures were extensively reviewed during appraisal and meetings were held with human resources staff at corporate and plant levels and were found to be appropriate, well documented and in compliance with Chinese regulations and the IFC Performance Standards. The terms of and conditions of employment, work expectations and compensation structures, and workers recourse and grievance procedures are clearly described in the Employment Handbook provided to all employees during the requisite week of basic training. Employees are provided with competitive compensation and access to performance bonuses as well as legally prescribed fringe benefits, Social Security and medical insurance. Most workers and technical staff take advantage of the company’s gratis lodging facilities at mill sites which were observed to be well maintained and equally available to all employees. Each processing facility has an organized labor representative who is able to mediate employee complaints when direct conversations with immediate supervisors and the human resources department fail to resolve grievances. Available labor Inspection reports and internal records indicate consistent compliance with Chinese labor requirements. According to the HR Policy hiring and promotion are based on professional skills and are without regard to personal characteristics unrelated to the inherent job requirements. There were no observations of child labor and discussions with the HR unit indicated that discrimination and harassment of any type are strictly forbidden. Consistently high worker retention rates indicate broad satisfaction with working and living conditions and compensation.

Occupational Health and Safety and Workforce Protection – The Company has actively invested in manufacturing equipment that is both efficient and safe. The Companies’ new mills in Guangxi are among the most efficient and safe in China and its new acquisition in Huizou has had a long-running reputation for safe operations. The company has now implemented and certified all of its manufacturing facilities to the externally-reviewed OHSAS 18001 standard. Consistent use of appropriate Personal Protection Equipment, proper signage and restricted access to hazardous areas was observed. Exposure to VOCs and dust are primarily managed by good plant design and negative ventilation across manufacturing and storage areas. Review of OHS risk assessments information, and observed hazard mitigation measures at work stations, indicate appropriate attention to the risks inherent to panel manufacturing. Cross facility accident statistics, and routine analysis by the HR staff of accidents (includin
g near misses), provided additional evidence of a corporate culture that is actively promoting workplace safety through prevention and investment in people and equipment. Accident records for each mill were reviewed and accident rates found to be at or below similar operations in Europe and North America. Safety procedures within forestry operations were adequate although use of PPE were observed and lodging at one harvest camp needed upgrading.

Supply Chain - the Company’s wood supply chain includes a vast wood catchment area and includes a large number of aggregators, consolidators and primary supply contractors who transport bark, chips, dust and off-cuts to the Company mills. Information provided by the Company indicates that an estimated 12,000 households are involved in its wood supply chain providing significant income from low value mill wastes. However, due to the informal structure of lumber and veneer operations, the collection of wood residues from these cottage industries lends itself to risks associated with the use of child labor and/or forced labor under some circumstances. During the Wood Supply Assessment & Planning the Company will include review of the labor, health and safety risks and impacts of its wood supply chain operations. The team conducting the assessment will include a labor specialist with the appropriate skills and experience to identify the risks and aspects of OHS Risk assessment results, determine which of the risks are within its management control or influence, and identify mitigation measures to reduce these risks. The company will implement procurement procedures which give priority to those suppliers that can reasonably demonstrate the ability to comply with PS2 and applicable labor regulations. The Company will monitor primary supply chain on an ongoing basis in order to identify significant changes in its supply chain and take appropriate steps to remedy changes in labor and safety risks as necessary. (ESAP 2.1)

Energy consumption, Air Emissions – Panel manufacturing requires significant amounts of energy for feedstock drying, grinding and pressing. The company has continually invested in improving the efficiency of its wood processing plants. It has sold or closed its least efficient plants and 90% of its production now comes from three continuous press operations which are considered “state of the art” plants. Thermal heat for drying and pressing operations is generated in boilers fired primarily with wood residue (sawdust and bark), and flue gases, formaldehyde emissions from pressing, and dust from grinding and sanding operations are all recycled back to the boiler furnace. The older two mills have been converted from coal-fired furnaces to natural gas. Automated air and process control systems have been installed at all new plants further reducing waste and emissions. The three new plants recycle flue gasses, formaldehyde emissions from the pressing lines, and dust from sanding to the boiler furnaces nearly eliminating particulates. The company purchases all its electricity for mechanical, lighting and residential requirements from the public utilities and consumption (kWH/m3) found to be in normal industry range. Each plant maintains diesel back-up generators for emergency outages. The review of internal records and regulator reports indicate broad compliance with ambient and workplace levels of particulates (PM10), VOC’s NOX, SOX, formaldehyde and CO standards set by the government of China and within the ranges specified in the World Bank Groups General EHS and Board and Particle-Based Products Guidelines. Currently the Company does not have a centralized system to inventory and estimate it’s Greenhouse Gas Emissions. Since many companies in the wood products and panel business are beginning to report GHG’s associated with product on a per unit basis, Fenglin will develop a system to estimate its direct GHG emissions as well as indirect emissions associated with electricity.(ESAP 3.1)

Water Consumption, Effluent and Waste Management - Water consumption is largely for steam generation purposes. Consumption of water per production unit (m3/ton) are consistent with PB and MDF plant norms, and within the EHS Guidelines (above) with PB plants requiring more water for chip washing which is provided through the industrial zone. Each plant does maintain residential housing and refectories which are individually metered for energy usage. Sanitation water undergoes at least primary treatment prior to discharge to their respective industrial park facilities. Third party records provided during appraisal indicated discharge compliance with against Chinese and WBG EHS General Guidelines. The Company intends to use the proceeds of the IFC investment to improve wood yarding facilities including increasing the area of covered shedding. Storm water run-off from covered wood decks is considered a major contributor to localized flooding and sediment loading
. During construction of impervious areas and covering of yard areas, the Company will make all efforts to ensure that improvements in impermeable surfacing will be accompanied by full consideration of storm water abatement impacts and mitigation options. (ESAP 3.2)

Hazardous Material, Pesticide Use and Management and Noise Abatement – The primary adhesive resin used in PB and MDF manufacturing is urea-formaldehyde which is considered toxic in concentrations exceeding 3.0 - 5.0 parts per million (ppm) causing a variety of adverse health effects impacting the eyes and respiratory systems. Each production plant maintains areas for the storage and mixing of crystalline urea with gaseous formaldehyde which are combined in an aqueous format during the matting process. Protection measures practices by the Fenglin Group Companies included proper storage and bunding for raw chemicals, plant design which minimizes exposure time, and recycling of VOCs from mixing and forming areas to the boilers. Negative air flow and use of cartridge respirators were observed to be used for workers frequenting the forming, pressing and cooling areas. Heat, pressure, dust and fire control systems are fully automated and carefully monitored by staff located in climate controlled locations. The new plants are outfitted with comprehensive spark detection, deluge and fire control systems supplement with appropriately distributed extinguishers. Industrial hygiene and dust management was good at all plants. Noise is monitored and recorded daily at chipping and sawing/sanding areas and use of proper hearing protection observed at most sites. Compressed gasses, fuel storage and natural gas are other hazardous substances at each facility and safety protocols for protection and use of these were observed at each facility. Inventories for hazardous materials were maintained and MSD information was available at appropriate locations. Within the forestry operations, WHO permissible composite fertilizers and glyphosphate herbicides are used which with are commonly used which can pose threats to water sources and humans through inappropriate application and inadequate buffer zone management. During the appraisal, IFC inspected the storage and use of these materials and found that employees and contractors had appropriate levels of familiarity of the risks.

Security Personnel - Manufacturing facilities are located in industrial zones with limited access and ceramic peripheral barriers. Plant security is provided by company employees who have undergone specialized training in security in all but one facility which uses a specialty security contractor for controlling perimeter safety. Access to all plants was controlled and internal and peripheral observed to be well organized and effective.

Community Health and Safety – The largest risks to community health and safety are risks from vehicular transportation of large volumes of wood waste from rural veneer and lumber operators to the Group’s plants. In Baise, Fenglin’s largest plant 60 to 70 30 ton trucks arrive at each mill daily. Vehicular accidents and fatalities involving pedestrians are commonly the most significant source of problems with forestry and wood products operators throughout the region. Since most of the vehicles are part of the Companies supply chain they have limited capacity to manage the risks. The company has close relationships with municipal governments and local police who have strict regulations and offer the best protection. However, the Company has some influence over at least its primary suppliers. The Company will develop and implement a Vehicle Operator Safety Training Program for its primary suppliers which are consistent with Chinese regulations and the requirements of IFC’s General EHS Guidelines (ESAP 4.1). This training, and associated communications about safe vehicle operations, will be commensurate with risks identified during the wood supply chain assessment (2.1, above). Forest fire is an inherent risk to neighboring communities. Fenglin manages fire risks through the size and natural boundaries of its dispersed plantations, training and equipping forest guards from the neighboring communities, and using regional detection and cell phone communications for primary response.

Protection and Conservation of Biodiversity and Ecosystem Services – Pine and eucalypts plantations were established several generations ago in Guangxi and are grown predominantly on steeper side-slopes and generally on degraded areas previously used for grazing and rain fed crops. Punctuated with small residual gallery forests and some karst formations, most of the region is rugged and highly modified. Nearly 40% of the Province is designated for forest production but there are significant areas on the western edge with Vietnam that are in National Nature Reserves (IUCN Category V-VI) with biodiversity and recreational value. Review of information from IFC’s biodiversity screening tool and review of other remote sensing information indicates very low risk for illegal logging or conversion of natural forests due to panel manufacturing. There was no evidence of recent conversion from the Region’s limited remaining natural forests associated with the Company’s purchase of wood fiber and round wood. Review of documentation of previous World Bank support to the Guangxi Forest Department indicates improving protection for natural areas and control of wood movement.

Sustainable Management of Living Natural Resources and Supply Chains –

The Company sources its raw wood from primary suppliers that aggregate and consolidate wood waste from a roughly 100 kilometer radius from each panel plant. The manufacturing of MDF and PB require consistent blends of hardwood and softwood from pine and eucalypts plantations. Most wood is derived from small diameter thinnings from State-managed forest farms or collective forest plantations. All wood observed at all facilities was of plantation origin although some formats (sawdust and chips in particular) are often blended prior to aggregation foiling exact species identification. Review of supplier contracts, transporter weigh bills, and interviews with Company forestry staff and local officials indicated that the supply chain documentation is appropriate to rural areas. Fenglin’s mills each have a documented FSC COC system in place which allows them to produce and label panel products as ‘FSC-certified’. Currently, it is not producing FSC-labeled products due to the informal nature of the wood supply chain and a lack of demand for FSC-certified product in its primary markets.

Fenglin’s Forestry Division manages about 15,000 hectares of plantations produces valuable lumber and veneer logs. Although little, if any, of the Company’s round wood production is used as feedstock for its own production they work closely with state and local leaders to improve forestry practices. The Company’s work in tree improvement and silviculture has made them a regional leader in forestry. The Company recently completed an FSC Pre-Assessment of some of its own larger forest plantations to the Forest Stewardship Councils’ Principles & Criteria for Forest Management (“FSC FM”) and intends to achieve certification on some are
as in 2014.

The Company understands the limitations of current wood supply documentation and the rewards that will materialize with incremental improvements to formalize the identification of wood source and origin included in ESAP 2.1. It also recognizes that improvements in its management of high conservation value forests within its own plantations will lead to continued leadership and value creation (ESAP 6.1) as will improvements in fertilizer use and dissemination of improved practices to potential suppliers (ESAP 6.2). As stated in 1.4 (above) the Company will develop its capacity to ensure documentation of its supply chain to verify legal origin.

The Fenglin Group has maintained good relations with local governments, workers unions, and influential community members which has effectively reduced or eliminated contentious problems with affected community groups around its mills and forests. Starting from a modest manufacturing base nearly 15 years ago the Company has developed a decentralized and organic management approach for milling and forestry which has helped it grow quickly into a regional leader. Each plant has a designated contact for community outreach and grievances and each plant manager is provided a budget for social investment programs. Although the plants operate in industrial zones the Company has established a proactive and direct engagement with communities on the plants fence lines. The company is considered to be a good employer exhibiting strong employee retention. There is an expanding interest in establishing its brand beyond quality and price to broader sustainability criteria including engagement with communities. It routinely makes resources available to plant managers and forestry division staff for social and physical infrastructure investments which will become more strategic in the future.

22 Baisha Avenue, Nanning, Guangxi, 530031 China

Broad Community Support is not applicable for this project

Title	Anticipated completion Date
Engage Environmental & Social Manager. The Company shall appoint a qualified individual to coordinate environmental, health, and safety activities and procedures across all wood processing and wood supply functions. The ESM will improve coordination of sustainability efforts, standardize and review EHS risks and costs, and standardize EHS reporting across manufacturing and wood supply operations.	10/30/2014
Plan and Implement Community Grievance Mechanism. Implement and maintain a procedure for external communications across all plants that includes methods to (i) receive and register external communications from the public; (ii) screen and assess the issues raised and determine how to address them; and (iii) provide, track, and document responses. The grievance mechanism shall ensure that grievances from affected communities and external communications from other stakeholders are responded to and managed appropriately.	12/30/2014
Develop and Implement a Strategic Community Investment Plan. Develop a process and plan by which the Company can identify and select social investments in affected communities surrounding the plants or located in areas adjacent to Fenglin’s forest operations in order to ensure broad sustainability of operations.	12/30/2015
Develop and implement a practical system and verification practices of legal origin of primary wood supplies. To the extent practical this system should be able to (i) meet established VLO requirements including identification of geographic source; evidence of legal right of access to fiber resource; some evidence of forest management practices; and supplier credentials to operate a legitimate business. The process will be (ii) trained into wood procurement staff and included in supplier agreements, and (iii) monitored for effectiveness.	12/30/2015
Develop a system for measuring and reporting the GHG emissions for all manufacturing facilities. The Company will establish clear procedures to guide its assessment and reporting of energy consumption and GHG emissions across its operations and product offerings.	09/30/2015
Conduct an assessment of wood supplier labor and workforce safety risks. As part of the forthcoming Wood Supply Assessment the Company shall engage a labor and workplace safety specialist to identify potential labor and workplace safety risks, determine the extent to which such risks are in the Company’s management control or influence, and recommend practical mitigation measures to reduce such risks as necessary. The company will implement procurement procedures which give priority to those suppliers that can reasonably demonstrate the ability to comply with PS2 and applicable labor regulations. The Company will monitor supplier risks on an ongoing basis and take appropriate steps to remedy changes in labor and safety risks as necessary.	03/15/2015
Wood yard improvements resulting in changes in impervious surfacing made with the proceeds of funds shall include Environmental Review. The Company will make all reasonable efforts to ensure that design and construction of improvements in log yard and wood storage areas will include appropriate consideration of storm water abatement impacts and mitigation options to minimize storm water run-off.	09/30/2016
Implement Vehicle Operator Safety Training Program. Implement a vehicle operator safety program consistent with Chinese regulations and the requirements of IFC’s General EHS Guidelines and commensurate with risks identified during the wood supply chain assessment (2.1, above). Include grievance procedure for potentially affected communities along transport routes.	06/30/2015
Develop and implement land acquisition policy and procedures. The Company shall develop a land acquisition policy and guidelines for accessing and screening should it re-engage in expansion of it forestry activities. In the event the Company acquires additional land (use rights or leaseholds) it will use these procedures to ensure: (i) integration of social aspects identified during any required environmental review; (ii) that land acquisition if associated with involuntary resettlement, economic displacement, or restriction of local communities’ access to land and resources will fulfill PS5 requirements.	08/30/2017
Establish a High Conservation Value Area identification methodology and implementation Action Plan. The Company will establish system for the identification and management of high conservation value forest and other natural areas within the area of its operations. The HCVF Plan will explicitly state how the Company will identify, map and protect such areas and how community participation will be used. The Company shall include all legally-established protected areas, including hunting reserves and registered community-based organizations in geographic and management information systems.	03/30/2015
Establish guidelines and procedures to minimize soil erosion and optimize the use of agrochemicals and in forestry operations. Such guidelines will address measures to reduce erosion during road construction, site preparation, and anticipated harvest activities. . Procedures for monitoring compliance with these procedures will be established and routinely reported internally and within the company’s forest certification audits.	06/30/2015