IFC’s appraisal considered the environmental and social management planning process and documentation for the Project and gaps, if any, between these and IFC’s 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 implementation of these measures, the Project is expected to be designed and operated in accordance with Performance Standards objectives.
PS 1 - Assessment and Management of Environmental and Social Risks and Impacts
Policy:
Air 8 assesses and manages its M-C portfolio by relying on the Sponsor’s E&S policies and risk management systems as well as their EHS organizational structure. The L&F M-C Code of Conduct (“L&F M-C CoC”) is the Sponsor’s key policy document (https://www.lifung.com/wp-content/uploads/2023/10/Li-Fung-Supplier-Code-of-Conduct.pdf) defining the environmental social and governance (ESG) objectives and principles in assessing, monitoring and managing the M-C portfolio. L&F also adopted and disclosed policies on child labor and forced labor (https://www.lifung.com/our-strategy/esg-strategy/). M-Cs funded by L&F are required to contractually sign up to the L&F M-C CoC and complete L&F E&S onboarding training before joining the L&F supply chain network and taking buyer orders.
L&F’s M-C CoC defines requirements for M-Cs regarding governance systems (e.g., identification of E&S risks and impacts), workplace safety and health (e.g. OHS risk management, worker accommodation), fundamental rights at work, and environmental performance. The L&F CoC has been continually updated based on internationally recognized standards and frameworks, such as the United Nations Universal Declaration of Human Rights, the International Labor Organization's (ILO) Declaration on Fundamental Principles and Rights at Work, the OECD Guidelines for Multinational Enterprises, the Paris Climate Agreement, the United Nations Framework Convention on Climate Change, and other relevant international standards. The L&F CoC has also been updated with input from L&F’s professional industry partners such as Amfori, SEDEX and Wrap, the Centre for the Child Rights for Business, and The Mekong Club.
To strengthen its E&S risk management systems, Air8 will establish and adopt an overarching E&S policy defining E&S objectives consistent with the principles of IFC Performance Standards 2012 (PS) (ESAP #1.1).
Identification of Risks and Impacts:
Air8 presently relies on the Sponsor's E&S policies, procedures, systems, and organizational capacities to undertake the initial E&S assessment and performance monitoring of M-Cs against host country national laws, and requirements of L&F’s M-C CoC. Hence, as per ESAP #1, Air 8 will adopt the existing L&F M-C CoC and L&F environmental and social management systems (ESMS). L&F has established its internal E&S risk assessment and performance rating system. All M-Cs are placed in one of five E&S risk rating categories: A-Approaching Compliance; B-Improvement Required; C-Substantial Improvement Required; D-Immediate Remediation Required; and F-Zero Tolerance. A set of criteria unique to that category defines each category. Approval of a new M-C to join the L&F network for the first time and to take ongoing orders from L&F buyer-clients is contingent upon that M-C attaining and maintaining at least a C-rating, with ratings determined and updated based on site and remote audit results. E&S performance assessments are performed internally by qualified L&F E&S officers or externally by certified E&S auditors. Air 8 uses approximately 100 E&S risk management-related criteria addressed in L&F M-C CoC to cover the key thematic performance aspects of M-Cs such as:
i) Overall working conditions; potential child and forced labor practices; equal opportunity and non-discrimination; workplace anti-harassment; worker accommodation conditions; freedom of association and functioning of labor unions or worker committees; robust retrenchment policies and practices in place; effective worker grievance mechanisms and anti-reprisal policies in place.
ii) Occupational health and safety performance of M-Cs (e.g. risks related to working at heights and in confined spaces; worker exposure to volatile organic compounds; indoor air quality);
iii) Life & fire safety compliance status with the national building and fire safety codes (e.g. related to adequacy of egress; review of types and quantities of combustibles and ignition sources on site;).
iv) Greenhouse gas, energy, water, and material consumptions and efficiencies at M-C factories.
v) M-C compliance with national pollution standards and emission limits.
vi) Potential impacts of M-C operations on local communities; and
vii) Effectiveness of M-C engagement with stakeholders and redress of potential grievances.
As part of the continuous update of the M-C CoC and identification of sector-specific E&S risks and issues, L&F also performs i) ongoing contextual and materiality assessments for merchandise sectors and sub-sectors, which involves interviewing a range of internal (e.g. staff) and external stakeholders (e.g. buyers; M-Cs and their staff; civil society organizations), to understand, develop, and prioritize a list of material E&S risk issues; ii) reviews of regional, national, and sector level public domain and proprietary databases (e.g. those from the Better Work Program) and E&S screening and scoping reports (e.g. 2022 Findings on the Worst Forms of Child Labor, U.S. Department of Labor) to identify and summarize material and emerging issues; iii) conduct ground-truthing and triangulation of trends and issues, done by L&F’s E&S field staff based in the countries where M-Cs are located. Supplementing the above, Air8 performs media and background screening on new M-Cs using third-party databases such as Refinitiv (WorldCheck).
Air8, will, as per ESAP #1.5, develop and implement:
i) an E&S risk assessment tool and due diligence procedures for screening of the M-C portfolio and selection of M-Cs eligible for funding; and
ii) an information management system to document that: a/ IFC loan proceeds have only been extended to L&F M-Cs in the top two E&S performance tiers as per the L&F E&S risk rating system definitions (i.e., A-Approaching Compliance and B-Improvement Required), and to those C-rated L&F M-Cs (i.e. C-Substantial Improvement Required) assessed to have met a pre-defined compliance threshold.; b/ C-rated M-Cs utilizing IFC loan proceeds being able to demonstrate that within 18 months of being C-rated, non-compliances have been effectively rectified.
Management Programs:
Air8 manages its M-C portfolio using L&F’s E&S management system (ESMS). The L&F ESMS consists of M-C CoC and standard operating procedures, E&S performance assessment monitoring and reporting mechanisms, M-C risk assessment and rating/categorization system including internal and external audit procedures and spot check mechanisms, templates (e.g. audit site inspection checklists), key performance indicators (KPI) & KPI targets, reporting/monitoring procedures, EHS related onboarding programs for staff, third-party E&S auditors, and M-C’s E&S personnel. Air8 will develop an augmented version of the existing L&F M-C CoC and L&F ESMS consistent with the requirements of IFC PSs and applicable World Bank Group (WBG) Environmental Health & Safety (EHS) guidelines as part of the Project. The augmented ESMS will at a minimum, include additional requirements on M-Cs such as but not limited to: hazardous material management; OHS performance monitoring and metrics (e.g., lost time injury frequency rates); the effectiveness of emergency preparedness and response planning; stakeholder engagement and grievance mechanisms; having a retrenchment policy in place; and ensuring freedom of association among M-C workers (Refer to ESAP # 1.2 for details).
Air 8 will provide financing to non-L&F network M-Cs with IFC loan proceeds only after demonstrating that it has developed and is ready to implement its own E&S policy and procedures as part of the augmented ESMS. This will include demonstrating that Air8 has developed its own in-house augmented ESMS and is able to implement this independently and without support from L&F E&S teams. Evidence of Air8’s ability to implement its own ESMS will include appointing sufficient in-house E&S team members (supported by sufficient qualified third-party auditors) with the required qualifications and experiences (ESAP #2-PS1).
Monitoring and Reporting:
Air8 currently relies on L&F E&S staff and external auditors engaged by L&F who conducts a combination of regular on-site E&S compliance audits (against requirements of host country national laws and L&F M-C CoC requirements) and unannounced spot checks of M-Cs. These are carried out based on pre-set inspection criteria and site inspection checklists that comply with L&F M-C CoC and national laws and standards. Spot checks focus on high-risk issues, whereas scheduled audits cover all E&S performance requirements of the L&F M-C CoC. About 15% of all L&F M-Cs are subject to annual unannounced spot checks.
Thematic audits (e.g. fire safety audits) are also carried out for sectors exposed to higher thematic risks. The audit frequency, depth, and breath applied to each M-C (and the actual audit checklists that are utilized) hinges on the risk rating category in which an M-C is placed and also on whether L&F has determined that an M-C is operating in a location (country/region) or sector (or both) exposed to thematic contextual risks (e.g. higher worker exposure to OHS risks), based on L&F’s regularly updated country, regional, and sector risk screening results.
L&F M-Cs are also monitored through industry-recognized audits (mainly based on BSCI (https://www.amfori.org) - and SMETA (https://www.sedex.com/solutions/smeta-audit/), and audits based on Better Work methodology. Such equivalent audits need to be conducted by certified auditors (Association of Professional Social Compliance Auditors (APSCA) (www.theapsca.org). If a M-C has passed an equivalent audit, it will be considered to have met L&F M-C CoC audit requirements. There are instances whereby L&F buyer-clients engage their own external auditors (e.g. BSCI Amfori, HIGG, SMETA Sedex, ILO Better Work) to conduct M-C factory audits, and L&F considers some of these to be equivalent audits.
Furthermore, to promote good practice, L&F voluntarily shares aggregated audit statistics and results with industry associations and civil society organizations (e.g., Worldly, SBT, CDP, EcoVadis, Mekong Club, The Centre for Child Rights) for validation and triangulation, and to seek their observations and feedback. Air8 will establish reporting protocols to receive updates from L&F on the compliance status of L&F M-Cs in a timely manner, including an alert regarding any new zero tolerance and critical issues identified (ESAP #1.8).
Organizational Capacity:
L&F has a Risk Management and Sustainability Committee reporting to the Li & Fung Board of Directors which is responsible for high-level E&S compliance and budgeting decisions. L&F’s ESG Committee headed by the L&F Head of E&S Compliance reports to the Risk Management and Sustainability Committee. Approximately 40 L&F E&S field staff located in several of the countries where M-Cs are located (i.e. Bangladesh, Cambodia, China, Guatemala, India, Indonesia, South Korea, Taiwan, Thailand, Turkey, Vietnam) report to HQ E&S team. E&S staff possesses relevant qualifications and field experiences as E&S auditors, and their local language skills facilitate effective communications with M-Cs and local stakeholders. The L&F E&S team leverages the support of about 10 external E&S consulting and auditor entities (e.g. Sustainable Apparel Coalition, Worldly, Europe-based BSCI Amfori focusing mainly on hard goods, SMETA Sedex, etc.), which are all APSCA-accredited. Commissioned by L&F, qualified audit staff and consultants of these entities carry out E&S due diligence and ongoing compliance monitoring of new and existing M-Cs, with L&F E&S staff closely managing/supporting external auditors and their work.
Prior to extending short term financing with IFC loan proceeds to non-L&F M-Cs, Air8 will demonstrate that it has built up an EHS organizational structure to effectively implement its augmented ESMS, by hiring sufficient E&S staff with adequate knowledge, skills, and experience (ESAP #2-PS1).
Training:
L&F relies on L&F’s EHS training programs and modules. L&F uses GIIP materials and guidelines (e.g. Health and Safety Guidelines for Workers in Denim Finishing, American Apparel and Footwear Association, 2018) to develop customized training materials for staff, third-party auditors, and M-C staff. These materials and guidelines also serve as the basis to continually refine internal sector-specific L&F SOPs, site inspection checklists, and other audit related internal documents.
L&F offers thematic knowledge trainings at M-C factories and provides such training to in-house and external auditors, to address ongoing and emerging risk issues. Using the Denim sub-sector as an example, L&F started a pilot training scheme in 2023 with 12 M-C denim factories from 8 countries participating in denim machine and operational safety training. The Sponsor requires that M-C staff (e.g. heads of facilities, human resources managers, and workshop supervisors) be regularly trained on technical topics.
Emergency Preparedness and Response (EPR):
The L&F M-C CoC requires M-Cs to i) prepare site-specific EPRs and robustly implement them (e.g. rescue plans for confined space operations), based on facility hazard point analysis and risk rating results, listing likely emergency scenarios that may arise at a factory (e.g. accidental leakage of HAZMAT; flooding) and required mitigations; ii) have clearly defined roles and responsibilities, including EPR chains of command of M-C staff to direct resources and personnel when potential emergencies transpire; and iii) regularly conduct EPR drills with staff participation in coordination with local fire brigades. Air8 will, as part of efforts to establish the ESMS (ESAP #1.2), will ensure that an EPR is in place which is consistent with the L&F EPR.
PS 2 – Labor and Working Conditions
Labor and Working Conditions(Air8):
Air 8 has a staff count of 29 workers based in China/Hong Kong, India, and Singapore, while L&F had about 4,200 employees worldwide as of the end of 2022. Air 8 adopted L&F’s human resources (HR) policies, procedures, employee manuals, and employment contract templates. HR policies and procedures comply with the respective countries' regulatory requirements of their operation. Air8's employee code of conduct and business ethics explicitly state principles of equal opportunity, non-discrimination, anti-harassment in the workplace, and respect for freedom of association and collective bargaining, and includes an anti-reprisal and whistleblower policy. Where gaps exist, Air 8 will revise its HR policy and procedures to comply with IFC PS2, focusing on labor management and working conditions, compensation and working hours, discrimination, grievance mechanism, freedom of association, and OHS (ESAP #3).
Labor and Working Conditions (M-Cs):
L&F’s M-C CoC requires that all M-Cs sign an employment contract with each worker, which specifies terms of employment, including the rights of workers in relation to the payment of wages, overtime, prohibition of retention of worker identity documents, freedom of movement, and other rights to prevent any forced labor practices. Where a M-C utilizes labor recruiters/agents/intermediaries which hire migrant workers and dispatch them to work at that M-C, L&F has detailed requirements on the practices of labor agents (e.g. labor agents must be licensed to operate by host country laws; they cannot charge workers a recruitment fee or if charged, this needs to be fully reimbursed by the M-C to workers in a timely manner; etc.)
Workers’ Organization and Freedom of Association:
L&F’s CoC recognizes freedom of association (FoA) as a fundamental worker’s right. As per its M-C CoC, L&F requires M-Cs to establish written policies on FoA and collective bargaining, appoint personnel to implement these policies and communicate such to workers, and consult with workers through trade unions or other elected worker representatives when contemplating workplace decisions that may profoundly affect workers. Where national laws prohibit labor unionization, L&F requires M-Cs to ensure no interference in the setting up and functioning of alternatives (e.g., worker committees).
Non-Discrimination and Equal Opportunity:
The L&F M-C CoC describes requirements to ensure equality of treatment for all M-C workers and to prevent any form of discrimination and harassment/violence (including sexual harassment and gender-based violence) at M-C facilities. These rights are regarded as fundamental worker rights, and violation of them would place an M-C into L&F’s D-rated category. M-Cs also need to demonstrate that they have functioning grievance and remediation procedures (including anonymous channels) to handle potentially sensitive complaints related to discrimination and harassment. Zero cases of and zero tolerance of gender-based-violence (GBV) and sexual harassment is a stated corporate KPI of L&F, which engages the Better Work Program to carry out independent social compliance assessments and GBV training at M-C operations to prevent GBV and sexual harassment at M-C workplaces. L&F E&S field teams and third-party auditors also utilize the APPRISE app in their M-C spot checks to assist in detecting potential cases of GBV and sexual harassment, which includes conducting multi-lingual anonymous surveys of female M-C workers, and which enables M-C workers to anonymously report any such potential cases to L&F directly. During scheduled audits and unannounced M-C spot checks, L&F and third-party auditors also assess whether worker dormitories are gender segregated, emphasizing staff safety and privacy protection and whether on-site M-C security arrangements are non-intrusive.
Retrenchment:
In its due diligence and M-C compliance monitoring, L&F utilizes audit checklists developed based on GIIP materials (e.g., Retrenchment: Guidance for FLA-affiliated Companies, Fair Labor Association) to assess the effectiveness of M-C’s retrenchment planning policies and practices.
M-C Worker Grievance Mechanisms:
The L&F M-C CoC requires M-Cs to have functional worker grievance redress mechanisms (GRM) and regularly verify their effectiveness during site audits and spot checks. In addition to this, L&F also operate a direct grievance mechanism for workers through several means:
I) During due diligence of new M-Cs and compliance monitoring, L&F field teams engage with local stakeholders (e.g., M-C workers) from time to time to collect their views directly. In the past twelve months, L&F field teams interviewed about 1,500 M-C factory workers.
II) In 2023, L&F implemented an additional grievance mechanism called “FaceUp” managed by a professional third-party organization engaged by L&F. This allows M-C workers to submit their views and grievances directly to L&F and Air8.
III) Like FaceUp, all L&F textile sector M-Cs in Bangladesh are required to join the AMADERKOTHA worker GRM program (part of the RSC and Nirapom Inspection Schemes).
IV) In October 2023, L&F launched its Incident Management Program, which includes a dashboard summarizing prominent issues and the ability for M-C workers to directly file grievances with L&F through multi-language third-party Apps (e.g. BSCI-Amfori "Speak for Change" Program; the RSC and Nirapom Inspection Schemes in Bangladesh; the Apprise APP giving M-C workers a QR code to scan and also allowing third-party auditors to interview M-C workers virtually and to collect worker feedback real-time during site audits; and L&F's in-house whistleblowing program with QR codes and a Chat App for M-C workers to access).
Protecting the Workforce:
L&F’s Child Labor Policy, which references International Labor Organization Convention No. 182, describes in detail its commitment to prohibiting all forms of harmful child labor practices and is integrated into the L&F M-C CoC. The L&F M-C CoC includes detailed definitions and requirements on topics such as how M-Cs are expected to robustly verify worker age, what is defined as hazardous work, etc. Any M-C found to be in breach of L&F child or forced labor requirements is immediately rated as F-zero-tolerance and suspended by L&F.
As described under PS1, L&F has published its Modern Slavery Statement at its corporate web link, which describes in detail how the Sponsor safeguards against potential human rights and modern slavery risks in M-C operations, including how technologies to hear workers’ voices directly are utilized to this end (e.g. the use of third party APPs diginexLUMEN and Apprise to screen for any potential modern slavery practices at M-Cs during site audits).
Occupational Health and Safety (OHS):
L&F's M-C CoC includes detailed OHS requirements (e.g., M-Cs having OHS policies and all required permits in place; having a functional OHS committee comprising management and worker representatives with records of meeting minutes retained; proper signage at risk points; lock-out tag-out procedures followed; records of all broken needles at apparel factories kept; installation of guardrails to prevent falls).
In 2022, M-C’s reported that there were zero work-related fatalities at M-C factories and six lost time accidents (LTAs) recorded at M-C premises: 3 in Bangladesh, 2 in India, and 1 in Jordan. In the event of an incident, L&F auditor teams will be dispatched promptly to M-C sites to conduct investigations, identify root causes, and develop corrective OHS action actions).
L&F monitor its M-C portfolio's life and fire safety performance. The L&F M-C CoC requires that all M-Cs: (i) demonstrate compliance of facilities they are using with the respective national building and fire safety codes and that facilities possess valid fire safety permits; (ii) have SOPs in place specifying requirements on fire prevention, alarm systems, hot-work, EPR and EPRP drills, ensuring unobstructed evacuation exits and passages, ensuring adequate and functioning fire-fighting equipment and suppression systems, having regular systems maintenance and inspection done by a licensed third party, and maintaining adequate and accessible water supply for fire-fighting purposes; (iii) train all workers on factory L&FS requirements; and (iv) properly store flammable and combustible materials with effective controls and signage in place, and ensure no open flame or ignitions near these materials. The regular site audit and unannounced spot check site inspection checklists utilized by L&F in-house and third-party auditors include detailed questions to audit the above and other relevant aspects.
PS 3 – Resource Efficiency and Pollution Prevention
Resource Efficiencies and Greenhouse Gas (GHG) Emissions:
Water and energy conservation is a strategic priority of Air8. In 2022, L&F achieved a 5% reduction in energy consumption and 33% in water consumption in their offices, compared with 2021. L&F monitors its M-C portfolio's water, energy, raw material consumption and GHG emissions. Several subsectors with notable energy and water consumption have been identified (e.g., denim M-Cs, fabric mills, and laundry workshops). L&F has implemented several pilot programs and training modules to support M-Cs in reducing their water and energy consumption footprints.
L&F actively supports efforts by M-Cs to voluntarily identify and implement GHG-emission reduction opportunities. This is done through the Sponsor’s ongoing M-C Climate Program, whereby L&F teams and an external consulting firm engaged by L&F work closely with M-Cs to identify financially and technically feasible GHG reduction opportunities. For the 1,300 M-C factories participating in the voluntary HIGG-FEM program, L&F and its third-party consultant aggregate their total self-reported GHG emissions (with breakdown data), using such data to inform GHG reduction efforts by M-Cs.
Pollution Prevention:
L&F, in line with its M-C CoC, requires M-Cs to establish and implement an environmental management system (EMS) that ensures compliance with applicable national laws and standards, and to implement mitigation measures linked to their operations with respect to monitoring and management of air emissions, ambient noise, waste, wastewater, and hazardous material management. M-Cs are required to demonstrate a continuous and incremental enhancement in their environmental performance. As part of its ongoing M-C audits, L&F requires M-Cs to (i) share annual waste monitoring reports prepared by licensed third-party laboratories; and (ii) confirm that design specifications and capacities of on-site treatment setups (e.g. flue gas scrubbers installed in boiler stacks and wastewater treatment plants adopting sedimentation, mechanical flocculation, chemical coagulation, aerated lagoon, and activated sludge processes) enable M-C facilities to treat pollutants to applicable host-country standards before discharge to the ambient.
Non-hazardous waste management:
Fabric and fiber scraps, foam, discarded garments and footwear, packaging materials, and paper are key non-hazardous solid wastes generated at M-C facilities. L&F, as per its M-C CoC requirements, has programs supporting M-Cs' efforts to recycle fabric and fiber wastes. Waste audit trails are required from M-Cs to confirm proper handling, transport, and disposal (e.g. at designated landfills).
Hazardous material and waste management
The L&F M-C CoC lists responsible M-C hazardous material and waste (HAZMAT) management requirements as follows: (1) M-Cs must have HAZMAT policies, codes, and systems (e.g. proper display of material safety data sheets or MSDS) in place and ensure that workers are adequately trained; (2) separation of hazardous and non-hazardous waste streams on M-C premises; (3) all flammable/combustible materials and wastes need to be stored in specialized, dedicated, properly ventilated, and augmented warehouses with secondary containment and anti-explosion setups; (4) ensure that inventories of all hazardous chemicals and HAZMAT entering, stored at, and leaving M-C premises are regularly updated, and that the duration and quantities stored on site comply with host country regulations; (5) eye wash stations to be installed where required by MSDSs; (6) avoidance of sandblasting and use of substances listed in M/RSLs (Manufacturing/Restricted Substance List); (7) proper marking, use, inspection, storage, and access control of gas cylinders as per host country laws; (8) EPR drills to be conducted regularly involving all M-C workers.
The L&F regular audit and spot check inspection checklists shared with IFC include detailed questions on chemicals and HAZMAT management (e.g. whether secondary containment is in place at HAZMAT storage areas). At the corporate level, for M-Cs which have voluntarily joined the buyer-client-mandated HIGG/FEM Facility environmental improvement program, L&F annually collects and aggregates data on the total quantities of 16 categories of non-hazardous wastes (e.g. slag, paper, plastic, foams) and of 17 categories of hazardous wastes (e.g. empty chemical drums) generated by those M-Cs. L&F monitors these quantities as a corporate KPI.
