Light industry | Timber industry » FTA Industry Risk Assessment

Source: http://www.doksinet May 2017 Timber FTA INDUSTRY RISK ASSESSMENT Free Trade. Sustainable Trade Source: http://www.doksinet FTA INDUSTRY RISK ASSESSMENT Timber Timber represents one of the oldest and most established industries in the world and demand for forest-derived products is steadily increasing. One major consequence of this is illegal deforestation, which can have serious impacts on ecosystems, the climate, and the well-being of local populations. In an effort to limit such negative impacts, governments around the world are putting in place regulations and laws to protect forests and stop illegal deforestation. In Europe, where most Foreign Trade Association (FTA) members in the timber business are based, companies face wide-ranging regulatory pressures. The European Union (EU) expects companies, especially large enterprises, to be diligent in managing their negative impacts and those of their supplier base. In response, FTA will support its members and their

timber supply chains through the Business Environmental Performance Initiative (BEPI). This report describes timber-related trade issues and examines several sustainability risks relevant to our members and their producers. It covers six material issues and provides an overview of emerging trends. The key topic is the EU Timber Regulation (EUTR). The scope in the supply chain is tier 1, which informs the Business Social Compliance Initiative (BSCI) audit findings. The country-level focus on producers is China and to a lesser extent Vietnam. Timber is used in an extensive range of products. The main product groups relevant to the 15% of FTA members involved in the industry are: > Furniture; > Stationary & textual/printed materials; > Household decorations/ornaments; > Arts and crafts; and > Lawn/garden supplies. This report prioritises trade and environmental issues more than each of the five previous FTA industry risk assessments. As with the previous reports, the

content is not about any single member’s actual supply chain. 2 FTA Industry Risk Assessment - Timber Source: http://www.doksinet TRADE ISSUES Business volume: China is one of the major suppliers of timber to the EU. According to a 2016 report by the European Commission, 21.6% of wood and 196% of pulp, paper and cardboard imported by the EU originated in China. The United Nations’ Food and Agriculture Organization (2015) cites China among the biggest exporters of wood-based panels, paper and cardboard. The country also leads the world in import volumes of industrial round wood, sawn wood, pulp for paper and recovered paper. China imports various kinds of timber from several different countries, most notably Russia and the U.S Chart 1 below, which consists of 3 graphs, shows the top 4 exporters to China by volume. As shown, rough wood imports from the top four countries in 2015 accounted for half of the total. Although volumes are much higher in rough wood and sawn wood,

plywood is important to illustrate since it is generally the cheapest and most used in furniture. Chinas Rough Wood Imports in 2015: US$ 6.87 billion Chinas Sawn Wood Imports in 2015: US$ 6.38 billion Other countries 15% 50% 9% Papua New Guinea 14% U.S 12% New Zealand Russia Chinas Plywood Imports in 2015: US$ 223 million Other countries 32% 19% 19% 14% 16% Other countries Thailand Canada 20% 45% 14% U.S Russia 9% 12% Russia U.S Indonesia Malaysia Source: Observatory of Economic Complexity: atlas.mediamitedu Regulatory environment in China & Vietnam: According to an extensive study (November 2016) funded by the European Commission, around 17% of China’s wood-based imports are at high risk of being illegal. Regulatory enforcement has steadily improved since 2000, when the share of illegal timber coming into China was higher. NEPCon, the stakeholder contributor to this FTA Risk Assessment, has developed forestry risk profiles that provide a concise overview of

facts and figures that are essential for sourcing legal timber. According to a report published by NEPCon (April 2015), Vietnam continues to import much of its timber from Laos, Myanmar and Cambodia where there continues to be high levels of deforestation. Later this year, BEPI will pilot a new module to help its participants and their producers increase supply chain transparency and reduce the risk of illegal timber. Issues to do with traceability, deforestation, unsustainable forest management and the illegal trade in wood-based products inform many of the international regulations we see today. Currently, the EU sets the highest standards for addressing the illegal timber trade The most notable benchmark is at EU level. Regulatory environment at EU level: The European Union Timber Regulation (EUTR) has been in force since March 2013. It lays out the requirements for actors who place timber on the European market The regulation applies to a range of timber products, including

furniture and pulp and paper. A comprehensive list of products covered in the EUTR can be found here. In brief, the EUTR: >> Prohibits placing illegally harvested timber and products derived from illegally harvested timber on the EU market; >> Requires the operator (actor who first places the timber products on the EU market) to exercise due diligence; and >> Requires traders involved in the trading of timber products to keep a register of who they buy from and who they sell to. FTA Industry Risk Assessment - Timber 3 Source: http://www.doksinet Under the EUTR, importers are responsible for having a due diligence system In effect, importers (defined in the regulation as the “operators”) are responsible for having a due diligence system in place to minimise their risk of placing illegally harvested timber on the EU Market. The EUTR due diligence system must contain at least the following elements: >> Information: Operators must have access to

specific information on the timber used in the product, including a description of the species, country of harvest, quantity, supplier’s information, buyer’s information and documents indicating the compliance of the timber; >> Risk assessment: Operators must analyse and evaluate the risk that the timber may have been illegally harvested. They must assess criteria such as: assurance of compliance with applicable legislation, prevalence of illegal harvesting of specific tree species, prevalence of illegal harvesting in the country of harvest and the complexity of the timber supply chain and timber products; >> Risk mitigation: If the operators are not satisfied that the risk of placing illegally harvested timber on the market is negligible, they must act by implementing risk mitigation measures, including for example: requiring additional information or documents from suppliers or third-party verification. The EUTR places considerable responsibility on the

“operator.” From wood product verification to diligent record keeping, buying practices cannot be separated from the EUTR requirements. It will remain critical for timber importers and others in the supply chain to maintain an effective due diligence system. The BEPI system supports companies in reaching due diligence requirements by mapping supply chains and visualising lower tiers through a collaborative approach. The BEPI platform enables members to engage directly with producers on issues of key importance; and it will be an instrumental part of the BEPI pilot project on timber. The EUTR and other timber-related EU regulations cited above are not the only comprehensive legal norms around. The US and Australia also go to great lengths to implement legal regulations. >> Regulatory environment in U.S and Australia: The Lacey Act is a U.S law from 1900 that bans the trafficking of illegal wildlife. The Act was amended to include timber and paper products. This landmark

legislation entered into force in May 2008 as the first ban on trade of illegally sourced wood products in the world (see here). Four years later, Australia introduced its Illegal Logging Prohibition Act. Detailed regulations on the Australian due diligence approach followed in November 2014 (see here). >> Tariffs: The EU has established a common tariff for all forest products. However, the level is zero for some wood products and furniture. Some countries, notably Russia, impose export duties on wood. EU furniture producers could face duties, imposed by the exporting country, on imported raw materials. They could also face duties imposed by the country where the product is ultimately sold. SUSTAINABILITY ISSUES ENVIRONMENTAL RISKS The following information is based on the BSCI 2.0 audit results which were carried out at wood processing factories. Under the BSCI 20 system, the scope of the audit does not include an assessment of responsible timber practices. However, the

Performance Area 12: Protection of the Environment, covers broad environmental topics: impact assessments; integration of local legislation; permits and licenses; waste management; water management. 462 timber producers from two dozen countries were audited between May 2015 and March 2017. Most of the audits (72%) took place in China, followed by Vietnam (14%). The rest (14%) were carried out in 22 other countries spread across 4 continents. In China, 84% received a rating of C: Acceptable. Some 13% were rated D or E: Insufficient/Unacceptable, while 3% achieved a rating of A or B: Good/Outstanding. Although nearly a fifth of producers in Vietnam (17%) achieved a rating of either A or B, nearly a quarter (23%) were rated either D or E. Meanwhile, the results of those audited in the other 22 countries were varied. As a proportion, those Other Countries had both the best and worst social performance (see Chart 2). 4 FTA Industry Risk Assessment - Timber Source: http://www.doksinet

84% 60% 13% 3% 23% 17% China Vietnam Good/Outstanding Acceptable 30% 30% 40% 22 Other Countries Insufficient/Unacceptable Chart 2: BSCI 2.0 audit results (May 2015 - March 2017) According to the scope of BSCI 2.0 (see page 4), most of the audited timber producers are doing a good job of protecting the environment. In China, however, 37% still need to remediate environmental policies, procedures and practices in multiple ways. In Vietnam, less than a fifth (18%) need to make substantial improvements compared with 20% of those in the 22 Other Countries (see Chart 3). 37% 18% 20% Overall, the BSCI audit results highlight two major environmental risks: • Lack of due diligence in handling hazardous chemicals • Some common practices go ahead without the full set of official permits China Producers and their clients (up to the retailer) must have the means to trace as well as track their purchases Vietnam 22 Other Countries Chart 3: Percentage of factories with low

protection of the environment (May 2015 - March 2017) LACK OF DUE DILIGENCE IN 1. HANDLING HAZARDOUS CHEMICALS Findings: Many of the audited timber producers do not take full account of the chemicals used in different production processes. Secondary containment is frequently missing for paint thinner, glue and machine oil, among other chemical-based products. Some factories lack approval to transfer hazardous waste to other places. Many carried out transfers without a qualified service provider involved. Several do not monitor the pollution generated by the facility. Many of the same factories had not conducted an environmental risk assessment either. Impacts: Multiple consequences can arise from bad chemical management. When chemicals are improperly handled, or transferred to another site without careful oversight, they could end up contaminating the environment, impacting people’s livelihoods and lead to other hard to trace problems. FTA Industry Risk Assessment - Timber

What’s more, the wrong chemicals might be used if an incorrect label is posted on a container or if there is no label at all. Reputational risks increase, for members just as for producers, if there is no accountability or legitimate trace of who handled what and how at the production site. In addition, if finished products contain restricted chemicals (preservatives, pesticides, coatings, biocides, solvents) that end up being imported into the EU, they might be non-compliant with EU chemicals legislation (REACH). Recommendations: For many reasons, it is critical to know the composition of wood-based product groups. This implies knowing your suppliers as much as possible. Producers and their clients (up to the retailer) must be given the means to trace as well as track their purchasing practices. This requires due diligence and regular communications at every step of the way. Members should also revisit BEPI’s existing service: the Supply Chain Chemical Management module while

assessing the links between their product lines and the raw materials. 5 Source: http://www.doksinet 2. SOME COMMON PRACTICES GO AHEAD WITHOUT THE FULL SET OF OFFICIAL PERMITS Findings: Many of the producers had no formal approval to conduct impact assessments of the production site or approval to build new facilities. Many of their day-to-day activities proceed without formalised procedures for controlling air quality, greenhouse gas emissions or hazardous waste disposal. Impacts: Without formalised approval or verification processes, factories cannot be sure of the reliability of their machinery or internal quality assurance. Environmental compliance (like social compliance) is indispensable for the due diligence process. Going about business without having the necessary paperwork can lead to disorganisation, mistaken procedures, government fines or more costly outcomes. The activities of one producer can impact neighbouring communities and environments as pollutants and

chemicals tend to move freely beyond factory walls. For members, such lapses in compliance can complicate their commitment to upholding due diligence throughout their entire supply chain. A mismanagement of risks at factory level can have broader impacts. Importers might not be able to effectively meet EUTR requirements as operators. Members might struggle to meet certain business objectives. Meanwhile, aspirations might have to be pushed back for achieving sustainability in the supply. Recommendations: Producers should be encouraged to keep all applicable legislation on file. They should actively use the checklist of documentation provided in the BSCI System Manual: Annex 6: Most Relevant Documents for the BSCI Audit. Complying with EUTR and committing to BSCI implies a responsibility to accurately complete paperwork on a continual basis. SOCIAL RISK The BSCI audit results highlight two major social risks at the first tier of production: • Working conditions are not being assessed

on a regular basis if at all; and • Workers’ occupational health exams are not often conducted on a systematic basis. WORKING CONDITIONS ARE NOT 1. BEING ASSESSED ON A REGULAR FTA members can take an active role in encouraging dialogue inside the factory BASIS IF AT ALL Findings: At many of the 462 audited timber factories across 4 continents, dialogue between management and workers rarely, if ever, occurs. Often, the factories lack long-term goals of aspiring to protect workers’ rights in line with the BSCI Code of Conduct. Grievance mechanisms tend to exist on paper, if at all. Meanwhile, unambitious training programmes or a lack of training opportunities frequently discourages worker involvement. In many cases, the social performance of sub-suppliers and/or sub-contractors is unknown or raises questions. In summary, better protection of workers is needed at nearly half of the Chinese factories (46%) and most in Vietnam (61%) (see Chart 4). 46% China 61% Vietnam

45% Impacts: Absent channels of communication diminish opportunities for workers to provide feedback. The risks reinforce the need to define evaluation processes about the factory work taking place. Without collecting workers’ input or understanding how their rights are or are not being protected, the possibilities for making improvements are limited. Members cannot make informed decisions about how to support their producers if some BSCI (and legal) requirements are left unchecked. Recommendations: FTA members can take an active role in encouraging dialogue inside the factory. One way involves regular exchanges with senior management (even if via another business partner). Members can also promote training via the FTA Academy for their Chinese and Vietnamese producers, among others. Members can send their suppliers the BSCI System Manual’s Template 8: Grievance Mechanism. The form enables producers to consolidate information including follow-up with complainants. BSCI auditors

verify the documentation. 22 Other Countries Chart 4: Percentage of factories with low worker protection (May 2015 - March 2017) 6 FTA Industry Risk Assessment - Timber Source: http://www.doksinet 2. OCCUPATIONAL HEALTH EXAMS ARE OFTEN NOT CONDUCTED ON A SYSTEMATIC BASIS Findings: Across the two dozen countries, many producers are inconsistent in how they provide health exams to their workers. This concerns those in hazardous work such as wood processing and painting workshops. The lack of systematic health exams is one gap among others in occupational health and safety (OHS) risk assessments. Producers are also frequently missing mitigation and emergency plans. While certain risk assessment records are incomplete, some assessments are carried out after minimal consultation. Many factories need a more rigorous system for inspections. For example, several commonly lack covers for electrical control switches and panels. Temperature control is not always reliable Chemicals such as

those found in paint are stored without labels. At the same time, many workers carry out their tasks without proper personal protective equipment (PPE). Moreover, the required OHS permits are sometimes not available or absent. As Chart 5 shows, a sizeable minority of Chinese producers face challenges in OHS (37%). However, a majority have considerable improvements to make in Vietnam (58%) and in the other countries (55%). 37% China 58% 55% Vietnam 22 Other Countries Chart 5: Percentage of factories with high occupational health and safety risks (May 2015 – March 2017) FTA Industry Risk Assessment - Timber Impacts: Hazardous work puts a person’s health at risk. Without providing workers similar kinds of comprehensive health exams on a regular basis, the work environment itself can also be put at risk. If a worker’s health is not being monitored or treated, illness might spread. This is especially the case if certain groups of workers are not properly examined based on their

line of work. Incomplete risk assessments of workers have wider implications when little is known about the OHS environment. Electrical hazards, faulty ventilation, unlabelled chemicals, improper PPE and the absence of official permits endanger workers and could jeopardize the business. These risks can lead to emergencies, which become more serious when there is no corresponding plan. The prospect of a series of risks can quickly impact a member’s commercial and sustainability interests. The prospect of a series of risks can quickly impact a member’s commercial and sustainability interests Recommendations: FTA members should promote OHS training as much as possible. Whether it is in-house, available via partners in the supply chain and/or offered through the FTA Academy. Learning from consistent factory-wide assessments is a must. Safety measures can be developed in hindsight but should be looked at over time alongside other (best practice) examples in the supply chain.

Comparisons can inform foresight To develop the measures, involving those who are implicated can lead to real insights. Members can effectively identify producers’ OHS performance and the results of other BSCI Code of Conduct indicators by using the FTA Sustainability Intelligence Dashboard. The Dashboard allows you to view high-level results from the supply chain. The source of the data is the BSCI platform. This year, alongside upcoming BEPI timberrelated support, members will also be given a new dashboard called: Country Risk Guidance. By considerably expanding on the current Countries’ Risk Classification, FTA will provide its members a global snapshot of social, environmental and trade risks on a scale of 1 to 10. This tool draws on highly acclaimed organisations and expertise in the fields of trade and sustainability. It will assist members in developing country-level approaches to conduct due diligence. 7 Source: http://www.doksinet MATERIAL ISSUES AND TRENDS IN THE

SUPPLY CHAIN This report has looked at trade and sustainability issues in the timber supply chain by focusing mainly on BSCI 2.0 audited producers in China and, to a lesser extent, in Vietnam and several other countries located across four continents. The audit findings provide an indication of both concerns and areas to improve. High The six material issues covered in this report are major risks for FTA members in timber industries: > Trade: Sourcing Country Trade Regulation (in China); EU Regulations; > Environmental: Limited Capacity to Manage Impacts; Limited Capacity to Manage Requirements; and > Social: Low Worker Involvement & Protection; Occupational Health and Safety (OHS). As shown in the graph below, these six risks can be broadly classified according to their likelihood of occurring in the supply chain and their potential impact: Likelihood of Risk EU REGULATIONS LOW WORKER INVOLVEMENT & PROTECTION N SOURCING COUNTRY TRADE REGULATIONS OHS

ENVIRONMENTAL REQUIREMENTS Low ENVIRONMENTAL IMPACTS Low High Impact of Risk Materiality Assessment of the Timber Supply Chain MAIN TRENDS IN TRADE EU regulations, especially the EUTR, are highly likely to have a big impact on EU-based buyers of timber. Rigorous monitoring is essential Operators importing to the EU must closely examine the origins of wood-based products as part of running an effective due diligence system. The potential outcomes of missing necessary documentation remain significant, with breaches of the EUTR resulting in fines or even imprisonment. MAIN SOCIAL TRENDS Low worker involvement and protection remains a problem among many producers in timber industries. The biggest impacts can occur when management and workers have received little 8 training on workers’ rights. Limited channels of communication to discuss working conditions present additional challenges. OHS risks overall are slightly less common. However, risks such as partial monitoring of

workers’ health and incomplete on-site inspections underscore areas for improvement. MAIN ENVIRONMENTAL TRENDS The impacts of chemical mismanagement pose serious threats to the environment and workers alike. Risks can be very high if the chemical composition of certain products is unknown. Unlabelled containers and a lack of traceability in the supply chain can lead to big concerns for all involved. FTA Industry Risk Assessment - Timber Source: http://www.doksinet PERSPECTIVES FROM FTA’S KEY STAKEHOLDERS The Foreign Trade Association has invited: NEPCon (www.nepconorg) to provide an independent assessment of the outlook for the industry with a view on the issues discussed in this report. NEPCon is a non-profit organisation that builds commitment and capacity for mainstreaming sustainability. They foster solutions for safeguarding our natural resources and tackling climate change. This report raises key issues regarding EUTR compliance for FTA members and how to avoid legal

& reputation risk. The EUTR focuses on compliance at the forest level, which is often the most challenging aspect of compliance, as operators are usually far removed from the forest source, both physically and in regard to their position in the supply chain. Important challenges will be faced in the future when sourcing from China, which imports timber from a variety of countries; including the U.S and Canada, as well as Russia, Brazil and Indonesia. Likewise, Vietnam imports a lot of timber from Cambodia, Laos, China and Malaysia. So FTA members must look beyond those tier 1 countries to ensure EUTR compliance. FTA Industry Risk Assessment - Timber For domestic Chinese timber, a nation-wide logging ban on natural forest harvest by the end of 2017 will affect suppliers. This will likely see much less domestic timber available and an increase in imports to China to meet continued demand. In 2016, Indonesia became the first country to issue Forest Law Enforcement, Governance and

Trade (FLEGT) licenses, under a Voluntary Partnership Agreement between the EU and timber-producing countries. This has seen increased exports from Indonesia, as EU importers of FLEGT-licensed timber are exempt from conducting EUTR due diligence. Ghana will likely be next to achieve FLEGT licensing, however Vietnam – also negotiating – will also be encouraged to increase its efforts. 9 Source: http://www.doksinet Foreign Trade Association (FTA) Avenue de Cortenbergh 172 1000 Brussels – Belgium Tel. +32 2 762 05 51 – Fax +32 2 762 75 06 info@fta-intl.org – wwwfta-intlorg FOLLOW US ON TWITTER JOIN THE CONVERSATION LET’S CONNECT AND POWER YOUR CAREER SUSCRIBE TO OUR YOUTUBE CHANNEL & DON’T MISS OUR VIDEOS FOLLOW US ON FLICKR CHECK OUT OUR PHOTOSTREAM @fta intl linkedin.com/company/ foreign-trade-association Foreign Trade Association FTA-intl This report is prepared by the FTA secretariat for FTA members only. Any reuse of any parts of the documents require

prior approval from the FTA secretariat or the invited contributor