Basic Policy

The Sumitomo Forestry Group strives to contribute to building a sustainable and prosperous society through business activities that use wood, a renewable natural 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 timber 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.

The Sumitomo Forestry Group's sustainable wood procurement initiatives have responded to growing concerns about deforestation as one of the climate change factors with the introduction of our 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.

Promoting the Use of Timber and Wood Products from Sustainable Forests

To confirm collateral of legal compliance as precondition, the Sumitomo Forestry Group defines timber and wood products as sustainable if they fulfill one of the following.

Structure of Wood Procurement Management

The Sumitomo Forestry Group established the Wood Procurement Committee, chaired by the officer in charge of sustainability promotion at Sumitomo Forestry and comprising managers from departments in charge of wood procurement. The committee discusses issues related to group-wide wood procurement, including procurement standards and risk assessments for illegal logging.

In fiscal 2023, the Wood Procurement Committee met four times to confirm the legality and conduct a "Sustainability Survey" for all 141 directly-imported suppliers subject to screening and suppliers with whom overseas Group companies (distribution) do business. In these screenings, we regularly (once a year or once every two years), confirm the legal compliance and sustainability of both new and ongoing parties we conduct business with.

Sustainable Timber and Wood Products Procurement Initiative

Promoting Initiatives Adhering to the Procurement Policy

Procurement Policy

Under the Sumitomo Group Procurement Policy, the 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 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.
The 52 questionnaires for our sustainability survey are arranged according to check-list of such forest certification as FSC and PEFC, surveys from our purchasers, and sustainability assessment of cross-sectoral organizations.

Risk level

With this 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 determined according to such information from Transparency International's CPI (Corruption Perception Index), FSC' national risk assessment, UNEP/WCMC (United Nation Environment Program/World Conservation Monitoring Center) and reports from environmental NGOs to be A (low risk), B (medium risk) and C (high risk). Even when suppliers are identified as A (low risk), they are all assessed regardless of the volume or duration of contracts, since our business is centered on wood and timber and wood products suppliers should not be considered as non-significant. 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 2023, we audited 49 companies in Category A, 33 companies in Category B, and 59 companies in Category C.

Status of timber by region, and timber and wood products
(results for January to December 2023)

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

Review

Each procurement division reports the status and progress of these initiatives to the Wood Procurement Committee, facilitating continuous improvements throughout the supply chain.

Due Diligence in Wood Procurement

Initiatives for the sustainability of timber and wood products

GGL Certification of incoming PKS

The same due diligence is also applied to wood biomass fuels such as pellets and PKS supplied to biomass power generation as to timber and wood products to promote sustainable procurement.
In Japan, it will be mandatory to obtain third-party certification for PKS material supplied to biomass power generation plants that use the FIT system from April 2024 onward. In May 2022, Sumitomo Forestry obtained GGL certification*, an international third-party certification that shows biomass fuels have been produced in a legal and sustainable manner.
We will continue to promote the supply of biomass fuels that are sound in terms of human rights and the environment.

* GGL certification: A third-party certification that covers the production, processing, transportation, and use of biomass fuels, including PKS material

Education for Personnel in Charge of Procurement

In order to deepen the understanding of those in charge of wood procurement, the Sumitomo Forestry Group holds study session- once a year with external experts in the Wood Procurement Committee to learn about current trends and the latest information in the world.

Nature Positive and Timber Procurement

In recent years, there has been a growing interest in biodiversity conservation and the concept of `nature positive.' Companies need to find answers to the question of how to promote wood procurement that leads to nature conservation. In December 2023, the Sumitomo Forestry Group organized a study session called “Biodiversity, Nature Positive, and Wood Procurement,” led by Mr. Shinichi Kawae, General Manager of the Nature Conservation Department of the World Wide Fund for Nature Japan.

During the session, Kawae talked about the current state of biodiversity, global trends, and international trends that are changing from climate change to nature. Participants also learned about the initiatives that will be required of companies in the future.

Reinforcing Engagement with NGOs and Other External Stakeholders

In our efforts for formulating and implementing our Action Plan, to respond sincerely to societal demands and to promote responsible procurement, we organized a stakeholder dialogue with environmental NGOs, ESG specialists and researchers in July 2019.

Experts from the World Wildlife Fund (WWF) Japan, Friends of the Earth Japan, Global Environmental Forum, Institute for Global Environmental Strategies, the Rainforest Action Network and Takasaki City University of Economics participated on the day of the dialogue.

In December 2020, approximately one and a half years after the start of the Action Plan to achieve the target of 100%"sustainable timber and wood products procurement," another stakeholder dialogue was held to report on the efforts made so far. Discussion included the implementation of the Sustainability Procurement Surveys and the status of the percentage of timber and wood products from sustainable forests being handled, and other challenges at hand.

In March 2022, as the final year of the Action Plan, a report was given on the results of the initiatives from 2019 to 2021, together with an outline of Mission
TREEING 2030, which was announced in February 2022.

In order to achieve the target of the Action Plan, reflecting the discussion from these stakeholder dialogues, we proactively approached suppliers that needed to make improvements and worked to deepen their understanding on the issues. Ultimately, we had to terminate our contract with suppliers whose sustainability could not be confirmed by any means, and in September 2021 we were able to achieve 100%"sustainable timber and wood products procurement."

In this regard, we were commended for suspending business with suppliers who did not show improvement in order to achieve our targets.

The Sumitomo Forestry Group will continue the implementation of active dialogue with stakeholders and strengthen its initiatives.

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 timber 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 wood as legal, and expressly confirming the legality of the entire supply chain, from logging to wood 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 Forestry 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.

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 2023, roughly 867 of our business partners are using this service.

Responsible Material Procurement

The Sustainability Procurement Surveys for suppliers of building materials and housing equipment, which has been implemented in the housing business since 2019, was also launched in the timber and building materials business from fiscal 2022. This marks the second time.

The main purposes of conducting the survey are (1) to ensure that the goods and services provided by the Sumitomo Forestry Group comply with various environmental and social laws and regulations throughout the supply chain, and (2) to share the Sumitomo Forestry Group's Procurement Policy, Human Rights Policy, etc. and to build better partnerships.

Conventional supply chain management refer to quality, cost and delivery, but in addition to these items, risks related to workers' rights, occupational safety and environmental issues must also be recognized and managed.

The content of the Sustainability Procurement Surveys questionnaire is based on international norms and the Sumitomo Forestry Group policies and consists of questionnaires on governance, human rights, occupational health and safety, the environment, ethics, information security, supply chain and social contribution.

In fiscal 2023, we sent the questionnaire to 126 companies, receiving responses from 116, for a response rate of 83.5%, which exceeded last year's 80.6% but fell short of the target of 85% for fiscal 2023. The target for fiscal 2024 is 90%, and we plan to increase the number of companies that participate in the questionnaire compared to fiscal 2023 and increase the response rate by gaining understanding of the responses.