In this section

Supplier standards and practices > P.31
Tobacco supply chain: strategy > P.33
Tobacco supply chain: long-term farmer profits > P.34
Tobacco supply chain: Agricultural Labor Practices
and child labor > P.35
Tobacco supply chain: sustainable wood > P.37

04 Responsible
supply chain
Our supply chain provides the
products, services, and raw materials
for our tobacco, pharmaceutical,
and beverage and processedfood businesses. We have tens of
thousands of suppliers around theworld, many of which are small-scale
farmers providing the raw materials
we need for our products.
We expect all of our suppliers
and business partners to upholdhigh standards of integrity. Our
Responsible Procurement Policy, ourSupplier Standards, and our Codesof Conduct detail our approach toselecting suppliers and establishingsupplier standards.

30 | JT Group Sustainability ReportSupplier standards and practices
With businesses in a wide range of sectors, our supply chain is large and complex. Wherever we operate, we expect our business
partners to share our commitment to the highest standards of business integrity, legal compliance, and responsible business practice.
At the Group level, our Responsible Procurement Policy sets this expectation. It clarifies that when selecting suppliers, we takeaccount of candidates’ compliance with relevant laws and regulations, and requires that we consider human rights, the environment,
and other social responsibilities. Please visit www.jt.com/csr/procurement/principle for more details on the policy.

Know Your Supplier
In JTI, our international tobacco business, we operate a formal
supplier selection and review process, based on criteria suchas assurance of supply; service delivery; quality of products
and services; commercial flexibility; innovation; ethical businesspractices; and respect for environment, health, and safety
regulations.

In our pharmaceutical and beverage and processed foodbusinesses, we select suppliers based on rigorous checks thatprioritize quality and safety. Both sectors focus on the full chainof supply, an approach that is described as part of our productresponsibility approach on pages 58–59.

Through KYS, a supplier completes an online questionnaire andprovides supporting evidence to show that their business meetsrelevant technical and commercial standards and also complies
with our KYS standards. Finally, once a supplier is contracted,
they receive JTI’s Supplier Standards, which set out a number ofrequirements that suppliers must meet.
In 2012, we introduced an additional step in the certification
process, which involves a site visit to review compliance with
our standards for specific categories of suppliers. In 2013,
external auditors conducted 11 supplier site assessments,
mainly in China. The suppliers involved have completed all
corrective measures identified during these assessments.

Certification process

Step 1
Potential supplier- initiate certification

Step 5a
If needed corrective actions
are undertaken at supplierlevel

Step 5

Step 2Due diligence- EU certification- Internal audit

Supplier screening- ongoing- On-site verification

Step 4

1,057

Certified global
and local suppliers

Step 3

Annual certification renewal

Supplier certification

Start business
relationship(contract)

JT Group Sustainability Report | 3104

Responsible supply chain

In our tobacco business, we established the JT Group Principles
in Leaf Tobacco Production in 2013. Under these principles,
we work with contract tobacco growers to improve thequality of leaf tobacco, raise workplace standards, protect theenvironment, and work to eliminate child labor. Please visit
www.jt.com/csr/procurement/leaf_tobacco for more details on
our tobacco production principles. More detail on our approachto sustainability in our tobacco supply chain is also provided on
page 33.

In line with the JTI Code of Conduct and recognized international
standards, we also run a Know Your Supplier (KYS) programfor key suppliers. KYS provides a framework for assuring that
our suppliers respect business integrity, equal opportunities,
fair employment, health and safety, and the environment. KYS
also aims to help ensure that our supply chain is free fromassociation with the illegal tobacco trade (see page 52).

Supplier certification to KYS *E

2012 2013

Number of new certifications

203

446

Number of certifications renewed

386

611

Monitoring compliance
Under KYS, in the event that shortfalls in standards are identified, a supplier is given the opportunity to implement corrective
measures. We then follow up with the supplier to ensure these measures are effectively in place.
We take a zero tolerance approach to the illegal trade in tobacco products (see page 52). If we discover a supplier has knowingly
engaged in illegal trade, or facilitated it, the supplier is blocked from doing business with us and their contract is terminated.

Agricultural Labor Practices training

Know Your Grower
Our Agricultural Labor Practices (ALP) set the standards we
expect of our contracted tobacco growers for safe and fairworking conditions. Know Your Grower (KYG) is our programfor monitoring and managing tobacco farmers’ compliancewith the ALP standards. An ongoing cycle of observation andcontinual improvement, KYG directly helps our contracted
tobacco growers to meet their contractual obligations to the
ALP standards (see page 35 for more details on ALP).
Within KYG, our farming experts observe labor practices during
farm visits where they advise on the best growing methods
to improve tobacco yield and quality. Farming experts record
any misalignment with the ALP standards, along with otheropportunities for improvement on contracted growers’ farms,
and provide advice on making improvements. Our farming
experts play a central role in KYG, and their training not only
includes the ALP but also provides the skills needed to support
growers to bring about improvements.

Implement Know Your Grower incorporating
ALP

32 | JT Group Sustainability Report

With the observations and data collected through KYG, we aim
to understand better those cases where growers do not meet
the ALP. This allows programs to be developed to help themmeet their commitments. This information will also provide
the basis for tailor-made social investments in our farming
communities.
Following successful pilots of KYG in Brazil and Serbia in
2013, and guided by the International Labour Organization(ILO) principles, we are accelerating implementation in thesecountries during 2014. We plan to implement KYG in the Africancountries where we buy tobacco leaf directly from contracted
growers during the 2015–2016 crop seasons. As KYG coverage
grows, we will train more farming experts to ensure thoroughobservation and the successful expansion of the program.
In 2013, 1% of total growers were involved in KYG program
preparation. It is planned to cover the whole directly contracted
grower base by 2018.

Target2012

2013

Rollout in Serbia and Brazil during 2014

Preparation of pilot
programs in Serbia
and Brazil

Implementation of pilot
programs in Serbia
and Brazil

Rollout in U.S., Zambia, Malawi, andTanzania by 2018

Tobacco supply chain- strategy
Securing a long-term supply of quality tobacco leaf is the foundation of our tobacco supply chain strategy. It allows us to continue
creating value for both the JT Group and the tobacco farming communities we work with. Our vision for international tobaccoprocurement (tobacco leaf procured internationally, i.e. outside Japan, is used by the whole Group) is to ‘lead in sustainable leaf
supply’ and is underpinned by four key strategic goals:

04

Our first priority is to preserve tobacco farming and ensure
the long-term viability of the farmers who supply us directly
and indirectly. If farmers cannot make a profitable livingfrom growing tobacco, then our business cannot succeed.
Our farmer profits model is being tailored to different local
circumstances and helps us to offer sustainable returns overthe long term.
Profit comes from more than price alone. We work closelywith farmers to ensure they have access to the rightgrowing materials and use the best growing and curingmethods to maximize the quality and yield of tobacco leaf
per hectare. We also encourage crop rotation, which canprovide alternative income, can improve food security, andpromotes soil preservation. Research and innovation is
crucial to understanding the best farming methods. Our
Agronomy, Development, Extension, and Training (ADET)
center in Brazil studies many aspects of tobacco farming,
and works closely with farmers to implement the results on
the ground.

2. Social and environmental leadership
By helping farmers to be profitable over the long term,
we can make a positive contribution to social conditions
in tobacco farming communities. We provide additional
support by investing to improve quality of life and overall
conditions in the rural communities where we operate. We
do this by creating access to clean water, improving wellbeing, and advancing education through targeted social
investments within our Grower Community Programs (seepage 35).

We aim to reduce the environmental footprint of ourtobacco supply chain, and our primary focus is on energy
reduction and good forestry practices. The latter is ofparticular importance because we rely on wood as a vital
fuel for flue-cured tobacco.

3. Operational excellence

It is vital that our operations are well equipped to support
our supply chain. By allocating suitable resources to ouroperations, we ensure that the appropriate organization,
capital infrastructure, systems, and processes are in place.

4. Access through partnership

We can only respond to the economic, social, andenvironmental factors that influence the long-term supply
of tobacco leaf by working in partnership. We build direct
relationships with farmers and, wherever possible, we aim
to purchase tobacco directly from farmers rather than fromauction floors. This helps to ensure that we secure accessto tobacco leaf in a responsible manner. We also work in
partnership with governments, NGOs, leaf tobacco dealers,and other stakeholders on issues in our tobacco supply
chain.
The initiatives and data in the tobacco supply chain sectionof this report primarily relate to our directly contracted
farmers outside Japan.

JT Group Sustainability Report | 33

Responsible supply chain

1. Preservation of tobacco farmingTobacco supply chain long-term farmer profits
Long-term farmer profits are an essential part of our strategy to secure a lasting supply of high-quality tobacco leaf. Many factors
affect the profitability of our farmers. Although some are outside our control, such as weather patterns and demographic change,
we focus our attention on those that we can influence, including cost of production, yield, quality, and price. As a result, we haveestablished four key pillars to improve farmer profits in our international procurement of tobacco:

Managing direct relationships with farmers

Supporting production cost savings

Modeling sustainable farmer returns

Innovation and better farming practices

Building and maintaining strong relationships with our farmers helps us
to optimize the factors that improve their profitability. Our local farming
experts work with our directly contracted farmers to help them improve
tobacco production techniques. Across Zambia, Malawi, Serbia, U.S.
and Brazil in 2013 we had 243 farming experts in place, up from 159
in 2012.

We have developed a unique farmer profits tool to support our goalof enabling farmers to earn sustainable profits over three to five
years. Currently in place in Brazil, the tool takes into account the local
conditions and other factors, including costs, risks, and alternative
income sources, which inform the price that we negotiate with farmers
each year. We also use the tool to check that the average price paid overmultiple crop cycles delivers progress towards sustainable profit. We willroll out the tool across Malawi, Zambia, U.S., and Serbia in 2014.

Reducing the cost of tobacco growing, harvesting, and curing resultsin direct savings for farmers. We can reduce costs by helping farmers
to be more efficient; for instance, fertilizer application in Brazil has
been reduced by up to 15% since 2010, and by bringing down the costof materials. We buy many input materials in bulk and pass savings on
to our growers. By sourcing ourselves, we can also ensure quality andreliability.

Our ADET center in Brazil is dedicated to researching tobacco farming
innovations that will improve quality and productivity. During 2013,
there were 75 ongoing trials, including assessments on fertilizing andirrigation methods, curing efficiency, mechanization, and agroforestry
and integrated pest management practices. The results of our research
are passed on to farmers in numerous ways. In 2013, we trained 230
farmers at the ADET center, and our farming experts host field dayson ‘model farms’, where a local farmer has been recognized for theirexpertise in applying our recommended agronomy practices.

Half-a-hectare of tobacco in a box
The ‘farm in a box’, distributed by our international tobacco business, provides all asmallholder needs to start a 0.5 hectare plot of tobacco. Each pack contains selected seeds,
crop protection materials, utensils, and safety equipment. An improved Grower Pack, now
being distributed in Zambia, also contains a growing manual that provides farmers withguidance. If required, a farming expert can advise the grower, using the photographs orcalendar in the manual. The pack also provides guidance on labor practices and safety
procedures.

Target2012

2013

Good agricultural practices

100% of directly contracted farmers receive technical support

93%

95%

Farmer cost of production model

Farmer costs of production model implemented across all countries
where we source tobacco directly from contracted farmers by 2013

100%

100%

Farmer profit modeling

Implement across all countries where we source tobacco directly fromcontracted farmers by the end of 2014

Pilot in Brazil

Review of pilot
and model
enhancement

34 | JT Group Sustainability ReportTobacco supply chain Agricultural Labor Practices and child labor
We source tobacco from several developing countries where communities are highly dependent on agriculture. Alongside improving
growing standards, we work with our farmer communities to address a range of important issues. These include improving the rights
and safety of tobacco workers through our Agricultural Labor Practices; improving living conditions and livelihoods through our
Grower Community Programs (GCP); and eliminating child labor, for instance through education with our ARISE program(see page 8).

Agricultural Labor Practices

Grower Community Programs

Our Agricultural Labor Practices (ALP), launched in 2013, define
the standards we expect of our contracted tobacco growers
for safe working conditions, fair treatment, working hours,
provision against forced labor, and freedom of association. They
also describe our stance against child labor and measures toeliminate it. Growers’ compliance with the ALP is monitored
through our Know Your Grower (KYG) program, which is partof our wider Know Your Supplier approach. We will expect allcontracted farmers to be compliant with the ALP once KYG
program is fully implemented across our tobacco supply chain.
For more detail on KYG and its rollout, please see page 32.

Our Grower Community Programs (GCP) deliver community
projects based on an assessment of need. In 2013, we
ran community programs in 82 communities: 11 in Brazil,
68 in Malawi, and 3 in Zambia. GCP priorities are school
infrastructure, education, water, sanitation, and community wellbeing. In 2014, we plan to launch a scheme to sponsor teachers
in order to build their skills and create conditions where bothteachers and students can succeed.

04

Responsible supply chain

Grower Community Program: Zambia
In 2013, we drilled boreholes to provide access to water for an
estimated 10,000 people in three Zambian tobacco communities.
This reduces the time spent fetching water and improves accessto clean running water. We have also funded a maternity ward inZambia’s Western Province, which provides access to safe pre- andpost-natal care for approximately 140 women annually. In termsof education, we are running adult literacy courses in the Chipata
district, reaching around 300 people annually. We also built the
Mwalauka village primary school, which provides education toaround 500 children.

JT Group Sustainability Report | 35

Child labor
We take a strategic approach to eliminating child labor where
we operate. At the core of our approach is an emphasis on
improving the economics of farming. Encouraging more
profitable farming practices, a guaranteed price for contracted
farmers, and good agricultural standards will help prevent
farmers from using child labor. Building on the economic
approach, our social approach engages communities on
the complex issues of child labor and establishes and trains
community members on community child labor monitoring
systems. This foundation underpins our key programs such as
ARISE.

ARISE aims to ensure that children are not part of the workforce
by providing education and engaging with tobacco farming
communities in various ways. This ranges from providing
educational materials, after-school tutoring, and mentoring
to vocational training for older children in farming schools.
Through ARISE, we work with communities to improve theirunderstanding of the long-term value of education, and thefuture prospects that it can bring. ARISE also works to replace
lost income from child laborers through Family Support
Scholarships, which can enable parents or guardians to send
their children to school.

In 2012, in partnership with U.S.-based NGO Winrock
International and the ILO, we launched a multi-year program
to help prevent and eliminate child labor in our tobacco
communities. The ARISE program works to tackle the social andeconomic factors that cause tobacco farmers to engage children
in hazardous work.

ARISE made good progress in 2013 with expansion in Malawi
and Brazil, and the program has been implemented in Zambia.
We aim to launch ARISE in Tanzania in the near future. See
page 8 for more details on ARISE.

Target
ARISE: our program to help prevent andeliminate child labor in tobacco growing
communities

Expansion of the ARISE programs in
Malawi and Brazil
Implementation in Zambia in 2013, andTanzania in 2015

ARISE in 2013

2012

2013

Program expanded in
Implementation in Malawi
Malawi and Brazil andand Brazil
implemented in Zambia

BrazilMalawi

TotalsChildren withdrawn or prevented from child labor

663

2,408

3,071

Children and youth enrolled in formal and informal education

573

2,408

2,981

Households with improved livelihoods

191

785

976

Children attending farm schools

90

500

590

Mothers attending agribusiness training

355

173

528

Community members educated in child labor elimination

930

1,162

2,092

Freedom from child labor,training for a future

Topping up vocational
schooling in Brazil

In the Ntcheu district, Malawi, the ARISE
project has withdrawn 100 children andprevented 200 more from entering childlabor. One of them, Doris, 16, could not
go to school because she needed to earnmoney for her family’s household. ARISE
provided Doris with vocational training in
carpentry skills in one of the program’sCommunity Service Outlets. It has learningmaterials, well-maintained equipment,
and provides training and start-up capitalto establish a small enterprise. ARISE also
provided similar support to one of Doris’s
relatives to make sure she and her siblings
remain free of child labor.

To reduce child labor, improve education,and retain young people in rural areas,
we invest in vocational training schools
for young people. In 2013, we renovated
the rural vocational school in the Vale doJaguari, which will serve the children of
230 of our contracted tobacco growers.
Twenty students are enrolled so far andmostly learn horticulture skills in out-ofschool lessons. The children can thenreturn to the family farm to practice what
they have learned, without interrupting
their normal school hours. According
to the President of the Vale do Jaguari
Association representing these types ofrural schools, “JTI is thinking about the
future. The Company is helping to reduce
the rural exodus by qualifying the youth inrural areas.”36 | JT Group Sustainability ReportTobacco supply chain - sustainable wood
In many regions where we operate, wood is vital for effective tobacco curing, both as a fuel and for building curing barns. A
sustainable supply of wood is therefore key to ensuring a long-term supply of leaf tobacco.
Deforestation has often been widespread due to pressure from agriculture and urbanization, weak regulation, and poor woodland
management.
To tackle this situation, we work with tobacco growers to educate them on the environmental and economic value of wood. We help
to replace the wood used for curing through tree planting initiatives and developing new barn construction techniques, supplemented
by our reforestation program.

Tree planting initiatives
Our agroforestry initiatives train and support farmers to plantand maintain enough trees to ensure they can meet the fueland timber needs of today’s tobacco growing communities,
and those of future generations. In Brazil, agroforestry is wellestablished and growers either plant trees for their own wood
supply or purchase wood from local renewable sources.

improved kitchen stoves in 2,323 households. By 2014, we plan
to have funded the planting of 24 million trees across Malawi,
Zambia, and Tanzania.

Barn construction techniques
Barns are used in both air-curing and flue-curing of tobacco.
Wood-built barns are commonly used for air-curing, and wood
is a common fuel source for flue-curing. To improve curing
efficiency, we conduct trials to develop low-tech improvements
in furnace and barn design adapted to the areas where we
operate. We train farmers in new developments and provide
direct support through our local farming experts. Recent
innovations include our live barn initiative and new flue-curing
technologies.

04

Live barns

Agroforestry in Zambia
In Zambia, our agroforestry initiative offers a financial incentive tofarmers for every tree seedling that survives each year. The year
2013 was an important one for the initiative, with four nurseries
producing 457,200 seedlings and over 1,000 farmers attending
our Agroforestry Roadshows. Three forestry experts and 41
farming experts continue to provide on-the-ground support to our
tobacco growers, showing them the benefits of ourAgroforestry Program.

Reforestation

Supplementary to our agroforestry initiatives is our reforestation
program. The program aims to regenerate previously deforested
areas in locations where we have directly contracted farmers
that depend on wood for fuel or timber. We also work on
the efficiency of cooking stoves in local communities, which
reduces fuel consumption.
During 2013, we exceeded our targets in Zambia’s Eastern
Province. We raised 3,595,281 seedlings and planted 3,304,679
trees against a target of three million, respectively. We also

100% sustainable wood supply established ineach country where we source tobacco directlyfrom contracted farmers

Live barns are changing the way that our farmers air-cure their
tobacco in Malawi and Zambia. Instead of using vertical timbers,
live barns are constructed by planting trees, which after three
years grow to form the main structure of a curing barn. Thisavoids the need for maintenance and a continuous supply ofwood for construction. During 2013, and as part of the pilot
program, farmers in Malawi and Zambia collectively planted
314 live barns. By 2018, we plan to establish 18,000 live barns
across Malawi and 4,700 across Zambia.

New flue-curing barns

Flue-curing barns require a constant heat source for each weeklong curing cycle. In Africa and Brazil, farmers mainly use wood,
which in Africa is becoming scarce and expensive to source.
Added to this, inadequate curing infrastructure and access tobuilding materials prevents farmers from realizing the full yieldand quality potential of their crop, and hence affecting theirprofitability.
To tackle this, we have developed a new low-tech barn designfor flue-curing. Farmers installing the new design features are
anticipated to benefit from an increase in cured leaf of up to
15%, a higher-quality product, and reduced wood consumptionof up to 65%.

Virginia, Flue-cured 100%by 2018

Burley, Air-cured 100%by 2018

2012

2013

Brazil90%

100%

ZambiaImplemented from 2013

2%

Malawi

Implemented from 201333%

ZambiaImplemented from 20133%

JT Group Sustainability Report | 37

Responsible supply chain

A tree nursery at a local school in Zambia to teach the children about
ecology, and provide seedlings to JTI contracted growers