Basic Policy

Sumitomo Forestry Group strives to contribute to a sustainable and prosperous society through business activities that use wood, a renewable resource. To do so, we engage in responsible wood procurement activities in accordance with our Wood Procurement Basic Policy formulated in 2005 and our Wood Procurement Principles and Policies formulated in 2007. To deliver legal and sustainable wood, we only engage in responsible wood procurement.

In 2015 with the Sumitomo Forestry Group Procurement Policy, we expanded our scope beyond wood to include a wide range of other procured products, such as metals, ceramics, resin and other building materials, and based on this policy, are engaged in procurement activities that take into consideration the economy, society and environment.

Sumitomo Forestry Group's sustainable wood procurement initiatives have responded to growing concerns about deforestation as a climate change factor with the introduction of its own wood procurement due diligence. In May 2019, we newly implemented an Action Plan that does not contribute to deforestation in order to further reinforce evaluation standards for sustainability.

To confirm the legality as precondition, we define timber and wood products as sustainable if they fulfill one of the following:

Sustainable is Defined as, Environmental: No contribution to deforestation
Social: No violation of human rights such as occupational safety, forced labor, indigenous rights, etc.

Sustainable is Defined as,
Environmental: No contribution to deforestation
Social: No violation of human rights such as occupational safety, forced labor, indigenous rights, etc.

1. Certified timber and pre-certified timber: FSC, PEFC, and SGEC
   (Regardless of CoC connection, we place emphasis on certification at time of production and promote a shift to certified timber)
2. Wood from planted forest
3. Natural forest wood where forestry management and distribution can be assessed as sustainable.
   (this does not include wood from conversion forests = wood harvested from natural forest that were converted to farm land such as oil palm plantations)
4. Recycled Wood

Sustainable Timber and Wood Products Procurement Initiative

Promoting Initiatives Adhering to the Procurement Policy

Procurement Policy

Under the Sumitomo Group Procurement Policy, Sumitomo Forestry Group carries out due diligence on wood procurement to ensure that the procurement is performed in a sustainable manner with consideration of legal compliance, human rights, labor practices, biodiversity conservation, and local communities.

Confirmation of Legality of Wood Procurement

Timber and Building Materials Business, Housing and Construction Business and each of wood procurement division at each Group company confirm that the wood provided by suppliers has been legally harvested, or that the timber and wood products they provide have been made only from legally harvested wood as a raw material. Each person in charge of procurement is required to follow the Wood Procurement Due Diligence Manual, gather the following information, cross-check relevant documents for each location and tree species, and confirm traceability of the entire supply chain all the way to the logging site.

With these information sorted by country, region, tree species, and wood type, risk assessment on the illegal logging or human rights violation is carried out based on procurement standards stipulated by the Wood Procurement Committee. Risk categories are A (low risk), B (medium risk) and C (high risk). Timber and wood products in the B (medium risk) and C (high risk) categories should not be solely evaluated with documentation to prove that they are legally harvested according to that country’s laws and regulations. In addition, when necessary, company staff are sent for on-site inspections to ensure traceability back to the logging site. In fiscal 2021, we audited 50 companies in Category A, 25 companies in Category B, and 117 companies in Category C.

Status of imported wood, timber and wood products by region in fiscal 2021
(results for January to December 2021)

Consideration for Biodiversity Conservation, Labor Practices and Human Rights, and Local Communities

Following items are checked, through Sustainability Procurement Surveys to suppliers and local interviews for the products that are being procured:

• Whether the rights of workers, local and indigenous community are abused in the area where we procure the products and their raw materials from. If this is the case, whether suppliers check their logging practices take place with consideration for these rights.
• Whether the high conservation values forests are included in the area where we procure the products and their raw materials from. If this is the case, whether suppliers check their logging practices with consideration to forests with high conservation value.

Review

Each procurement division reports the status and progress of these initiatives to the Wood Procurement Committee, facilitating continuous improvements throughout the supply chain. In fiscal 2021, the final year of the Mid-Term Sustainability Targets 2021, we strengthened our examination of suppliers' procurement to achieve 100% sustainable wood procurement, and also developed due diligence on the sustainability of wood and biomass fuels such as PKS and pellets.

Due Diligence in Wood Procurement

Progress of sustainability initiatives in timber and wood products

Education for Personnel in Charge of Procurement

Wood Production and Sustainable Forest Management in Indonesia and Malaysia

As concern about deforestation increases worldwide, interest is focusing on efforts by companies with regard to procurement of tropical wood. In this connection, we held a seminar on October 31, 2018 titled "Wood Production in Indonesia and Malaysia and Efforts Toward Sustainable Forest Management." It was attended by a total of 32 managers and other responsible personnel at international distribution departments handling tropical wood and other imported wood. At the seminar, participants learned the latest information about wood legality certification systems in both countries, the current state of certified timber, and sustainable forest management.

Forest Certification Systems

The Sumitomo Forestry Group operates under a system related to certified timber as one of sustainable timber and wood products defined as the handling of sustainable timber and wood products expands. To share the latest information, we held a Forest Certification Seminar on February 18, 2020 with the participation of 16 people in charge of wood procurement, including Wood Procurement Committee members. This seminar covered the history of the FSC, PEFC, SGEC certification systems and the latest information about the FM and CoC certifications.

ESG Investment Trends

In recent years, investors are becoming more focused on ESG investments, which results in high attention on due diligence of the suppliers that we procure timber and wood products from. Therefore, we invited an ESG expert, Dr. Takeshi Mizuguchi, Professor of Takasaki City University of Economics, to conduct a seminar on the recent trends of ESG investments on November, 2020. The seminar taught the audience about the backdrop of the ESG investments, the principles that act as the reason for ESG investments.

Sustainable Wood Procurement from a Financial Perspective

In recent years, private financial institutions and institutional investors have been incorporating sustainable finance into their portfolio (finance to realize a sustainable society), and the amount of ESG investments and green bonds issued are growing. Their focuses on corporate activities are on land conversion, countermeasures against the reduction of forest area and forest degradation caused by excessive logging, and sustainable wood procurement initiatives.

On December 16, 2021, Sumitomo Forestry held a seminar entitled "Sustainable Wood Procurement from a Financial Perspective" with Mr. Mutai Hashimoto, Lead, Sustainable Finance, World Wide Fund for Nature (WWF) Japan, as a lecturer. The seminar was announced to members of the Wood Procurement Committee as well as to relevant departments within the company, and was attended by a total of 84 people, 64 online in addition to 20 at the venue. At the seminar, participants learned an overview of the main outcomes of COP26, the concept of forests in ESG investment and policies of financial institutions, forest certification from a financial perspective, and the latest information on the TNFD (Task Force on Nature-related Financial Disclosures).

Reinforcing Engagement with NGOs and Other External Stakeholders

To formulate and implement our Action Plan, to respond sincerely to societal demands and to promote responsible procurement, we organized the first stakeholder dialogue with environmental NGOs, ESG specialists and researchers in July 2019.

After about one year and half since beginning our action plan to achieve 100% procurement of sustainable timber and wood products, we organized the second stakeholder dialogue with environmental NGOs, ESG specialists and researchers in December 2020.

Experts from the World Wildlife Fund (WWF) Japan, FoE Japan, Global Environment Forum, Institute for Global Environmental Strategies, the Rainforest Action Network and Takasaki City University of Economics participated on the day of the dialogue. After reflecting on the discussion in the previous dialogue, we debated the implementation level of sustainability procurement surveys and the challenges faced in the progress rate for handling of timber and wood products from forestry management as sustainable with these experts.

We have gained a wide range of feedback; as for there were no suppliers that fell into the category of required corrective actions through the Sustainability Procurement Survey, participants voiced their expectations for Sumitomo Forestry to engage with suppliers whose score are near the lowest-level and aspire further penetration of the required measures. In terms of the progress in the handling of timber and wood products from sustainable forests, feedback included the preference for further disclosure on the process towards the goal, not just the latest percentage, in order to better share the actual state with stakeholders. As the UK and other countries consider legislation such as regulations on the wood from conversion forests to eliminate deforestation due to agricultural production, Sumitomo Forestry received high praise for being a pioneer in committing to eliminate wood from conversion forests within its procurement standards, the discussion indicated the importance of awareness-raising measures to promote initiatives throughout the entire industry.

We will continue to expand our efforts toward achieving a 100% procurement rate of sustainable timber and wood products incorporating the feedback received through the stakeholder dialogue.

Assessing Wood Procurement by onsite interviews

Wood Procurement in Romania

Several environmental groups have expressed concerns about forest management and wood production in Romania in terms of whether logging has been appropriately conducted. In April 2017, members of the Wood Procurement Committee conducted on-site inspections, first gathering information through meetings with such organizations as the Ministry of Environment and Forests of the Romanian Government, the Embassy of Japan in Romania, ASFOR (Romanian Forest Association), among others. The members also went to a supplier manufacturing facility and inspected representative logging sites of logs that were transported to the facility. At the manufacturing facility, they confirmed that the supplier properly checks transport permits and the logs bundled on the trailer when receiving raw material logs at the lumber manufacturing plants. For example, the visiting team was able to confirm that the supplier was thorough in segregated management to ensure that logs exceeding the amount permitted were not used and that they engaged in such measures as reporting to forestry authorities. The team received an explanation about forest management from a forest ranger at the logging site and checked the actual hammer stamp mark and process when loading the trailer in the field. In addition, they were able to confirm the dedication to preserving the rare forest ecosystem by observing forest conservation areas under the Romanian government's jurisdiction.

Concrete Form Plywood from Indonesia

In recent years, several environmental groups have expressed their concerns about the legality of the logs used as raw material for plywood manufactured in Indonesia. In Indonesia, the SVLK timber legality verification system is in place, requiring timber product manufacturers and exporters to register by obtaining SVLK business certification issued by an independent evaluation and certification organization recognized by the National Accreditation Committee. Upon doing so, the business obtains documentation (V-Legal documents) from the independent verification and certification body certifying the timber as legal, and expressly confirming the legality of the entire supply chain, from logging to timber processing at manufacturing plants to export. In July 2018, we conducted an on-site inspection of the concrete formwork paneling plywood manufacturing plant that serves as our supplier. At a wood yard near the harvesting site, we were able to use QR-code labeling on tags attached to logs to confirm the harvesting information at the Indonesian Ministry of the Environment and Forestry website, as well as with V-Legal documentation. After the same logs were transported to the plant, we were once again able to use QR codes at a plant wood yard to access the ministry website and V-Legal documents, successfully tracing them back through the transport process to their harvest location.

In relation to plywood for concrete formwork used in the construction of Olympic-related facilities, in November 2018, an environmental NGO submitted an allegation to the Reporting Desk established by the Organizing Committee for the Olympic Games that logs used as raw materials by suppliers who have business relationships with Sumitomo Forestry may not conform to the Olympic procurement standards. Sumitomo Forestry responded to the report by presenting relevant documents and explaining to the Organizing Committee that such logs were not included in the supply chain. As a result, the Organizing Committee concluded that the allegations were untrue, and the report was not accepted, and was published on the website of the convention in February 2019.

In November 2021, a similar point was brought to the Tokyo Metropolitan Government's Olympic and Paralympic Preparation Office, which built related facilities. Sumitomo Forestry reiterated to the Tokyo Metropolitan Government that it complies with the Olympic procurement standards.

Plywood from Sarawak, Malaysia

In recent years, as is the case with Indonesia, several environmental groups have expressed their concerns about the legality of the logs used as raw material for plywood manufactured in Sarawak, Malaysia. Sarawak Forest Corporation was established in 2003 for the purpose of eliminating illegal logging in Sarawak, Indonesia. Thereafter, the Sarawak Timber Legality Verification System (STLVS) was created in 2015 to further strengthen efforts to eliminate illegal logging, reflecting the trend of elimination of illegally logged timber in countries such as the United States, the EU, and Australia. Sumitomo Forestry conducted an on-site audit of a plywood production plant of one of its suppliers in September 2019 to primarily confirm whether the STLVS was properly in operation from the logging sites to the plant landing.

We were able to confirm that tracking is possible from logs arriving at the plant to the harvesting district via identification processes such as orange tags proving royalty payments (for processing domestically), white tags (for log production) as well as markings and relevant transfer permits from regional forest offices through the detailed logging plans and tree logging lists required by STLVS. In addition, a signature from a representative in charge of the regional forest office on the back of the export application (K2) necessary to export plywood products confirms the products satisfy all of the STLVS standards.

Promoting Certified Timber

Sumitomo Forestry Group works with its procurement partners to build a reliable supply chain and to procure sustainable wood. As one index to confirm whether wood was obtained from forests with sustainable forest management, we support and utilize the Forest Certification System, a third-party certification system.

Furthermore, the Company itself receives the Forest Certification and we believe we can contribute to the system's wider use by providing the market and consumers certified timber.

Sumitomo Forestry Group has obtained FM certification (forestry certification system) for 229,000 hectares and CoC certification for 9 organizations.

* CoC (Chain of Custody) certification is a system that covers the processing and distribution of forest products. In addition to determining whether the forest product was from a certified forest (certified timber) at each stage of processing and distribution, it certifies risk assessments for uncertified timber. When all companies in the entire process obtain CoC certification, a certification mark can be displayed on the product.

Major Forest Certification Systems

FSC (Forest Stewardship Council^®) (FSC-C113957)

FSC is an organization founded in 1993 led by World Wide Fund for Nature (WWF) and consists of representatives from environmental organizations, forest workers, wood users and traders, human rights organizations, and local forestry unions. It is considered a pioneer amongst forest certification system operators.

Adhering to the 10 principles and 70 regulations encompassing environmental impact, local society, and indigenous people's rights, FSC-accredited certification bodies will undertake reviews. Recently, country or regional standards as well as the review procedure for small-scale forest owners have been introduced to provide greater support for diverse forests and owners.

PEFC (Programme for the Endorsement of Forest Certification)

Forestry organizations of 11 European countries established PEFC together in 1999 as an organization to mutually authenticate the system of each country. PEFC does not directly authenticate an individual forest, but when the PEFC's required conditions that adapted “the inter-governmental process” implemented by 149 countries is met, the country's own forest certification system is authenticated by PEFC. Joined by non-European countries in 2003, the organization originally called Pan European Forest Certification Schemes changed its name to Program for the Endorsement of Forest Certification. Since then, PEFC has shown drastic growth, and to date its total certified area is the largest across the world.

Sustainable Green Ecosystem Council (SGEC)

SGEC authenticates forest management that demonstrates both rich natural environment and sustainable wood production in Japan. With reverence for Japan's indigenous natural environment, social customs, and culture, the review premises on seven criteria. SGEC can also authenticate forestry operations and distribution systems under CoC. SGEC joined PEFC in November 2014 and submitted a mutual authentication application to PEFC in March 2015, which was mutually approved in June 2016.

Participation in JBIB (Japan Business Initiative for Biodiversity)

Sumitomo Forestry participated in the Japan Business Initiative for Biodiversity (JBIB) as a member company. JBIB is made up of companies that engage in activities aimed to conserve biodiversity. In fiscal 2020, the supply chain working group expanded its knowledge through informational exchanges with the Ministry of Agriculture, Forestry and Fisheries, the Ministry of the Environment and other government agencies as well as the EU.

Communication with Our Business Partners

In the Timber and Building Materials, given that it is characterized as being a regional industry, Sumitomo Forestry maintains close communication with the suppliers and purchasers of timber and building materials in each region.

Dennagon (Digital Delivery Slip and Invoice Transmission Service)

The Timber and Building Materials Division launched the Dennagon service in October 2016 as a website to access and receive digital versions of delivery slips and invoices traditionally exchanged on paper.

Using the Dennagon service provides the benefits below.

1. Purchasers can now receive the delivery slips and invoices the morning after they are issued by the Company instead of waiting for them to be delivered at an unknown time several times a week. The service also streamlines the tasks to process delivery slips based on the purchasers.
2. The work to check the content of delivery slips is made more efficient as well through a sorting function of the delivery data in Excel, with which the purchasers can easily find desired data.
3. The Dennagon service stores delivery slips for ten years and eliminates filing tasks by allowing various searches to help increase efficiency while reducing costs of operations at purchasers.

Another benefit of the service during the coronavirus disease (COVID-19) was the ability for purchasers to verify our delivery data without being in the office. As of fiscal 2021, roughly 680 of our business partners are using this service.