ESG Screening Requirements for Key Suppliers

Modern Dairy is committed to building a responsible and sustainable supply chain. In identifying and managing supply chain risks, we adopt a systematic approach to screen key suppliers. Key suppliers are those that have significant business relevance to the company, or pose a high risk of negative ESG (Environmental, Social, and Governance) impact, or both.

We conduct preliminary screening through desk research, a stage that does not involve direct contact with potential suppliers. This screening process aims to identify potential ESG risks and assess their business relevance. We primarily consider the following aspects:

1. Screening Level

Screening Level	Basis for Considering Screening Factors	Specific Requirements
Environmental	Risk of negative impact related to environmental themes, including but not limited to greenhouse gas emissions, energy consumption, water consumption, resource efficiency, pollution, waste, or biodiversity.	Energy and Emissions Management: Suppliers must demonstrate effective management measures in improving energy consumption and efficiency, utilizing renewable energy, and controlling greenhouse gas and other pollutant emissions. Resource Circularity and Waste Management: Suppliers must establish and implement circular utilization strategies for raw materials, packaging materials, etc., and adopt proactive waste management and reduction measures. Sustainable Water Resource Utilization: Suppliers must effectively manage water consumption, implement wastewater treatment, and adopt water recycling and water-saving measures. Biodiversity and Environmental Compliance: Suppliers must pay attention to environmental protection in their operational areas and surrounding ecosystems, strictly comply with all applicable national and local environmental laws and regulations, and provide proof of no significant environmental violations.
Social	Risk of negative impact related to social themes, including but not limited to child labor, forced labor, discrimination, freedom of association, right to collective bargaining, working hours, remuneration, occupational health and safety, and local community rights.	Labor Management: Labor Practices and Rights Protection: Suppliers must have standardized employment management systems, strictly prohibit child labor and forced labor, eliminate any form of discrimination, and effectively protect employees' basic rights. Healthy and Safe Working Environment: Suppliers must provide a safe working environment, establish and operate a sound occupational health management system, and ensure employees' occupational health and safety. Reasonable Remuneration and Benefits: Suppliers must provide reasonable remuneration and benefit arrangements, ensuring compliance with local minimum wage standards and relevant regulatory requirements. Compliant Working Hours and Labor Conditions: Suppliers must ensure that employees' working hours comply with legal provisions and provide labor conditions that meet standards. Community Relations: Community Communication and Engagement: Suppliers must regularly engage in dialogue with local communities and implement the FPIC (Free, Prior, and Informed Consent) principle. Community Impact Management and Development: Suppliers must assess the potential negative impacts of their operations on local communities and take mitigation measures, while actively supporting community project development and establishing a sound mechanism for protecting community rights. Sustainable Use of Local Resources: Suppliers must demonstrate sustainable management strategies in the use of local resources.
Governance	Risk of negative impact related to governance themes, including but not limited to corruption, bribery, conflicts of interest, and anti-competitive behavior.	Anti-Corruption and Anti-Bribery Mechanisms: Suppliers must establish and effectively implement sound anti-corruption and anti-bribery policies and management procedures, and be able to demonstrate standardized practices and execution capabilities. Conflict of Interest Management: Suppliers must establish effective mechanisms for identifying, disclosing, and managing conflicts of interest. Integrity and Compliance Management: Suppliers must establish sound policies and management procedures for integrity and compliance management, and ensure that their business conduct complies with all relevant laws and regulations, and does not engage in unfair competition practices such as false advertising or commercial defamation.
Business Relevance	Consideration of business relevance, including but not limited to procurement expenditure/share of procurement volume and substitutability.	Procurement Expenditure/Share of Procurement Volume: The supplier must account for a significant proportion of the company's total procurement expenditure or volume. Substitutability: The products or services provided by the supplier must possess market uniqueness, supply scarcity, and irreplaceability.

2. Risk Consideration Level

Risk Consideration Level	Basis for Considering Screening Factors	Specific Considerations
Country-Specific Risk	Risk of negative ESG impact related to the political, social, economic, environmental, or regulatory situation of a country.	Assess the overall ESG risk level of the supplier's country or region, such as the presence of high corruption risk, weak labor rights protection, inadequate environmental regulations, etc.
Industry-Specific Risk	Risk of negative ESG impact related to the unique characteristics of an industry, such as labor conditions, energy consumption, resource intensity, emissions, and pollution potential (e.g., manufacturing, services, agriculture).	Assess the inherent ESG risks of the industry to which the supplier belongs, such as high energy consumption industries, high pollution industries, labor-intensive industries, etc.
Commodity-Specific Risk	Risk of negative environmental, social, and governance impact related to the commodity's supply chain structure, labor conditions, land use and resource intensity, energy consumption, emissions, material toxicity, and pollution potential (e.g., metals, fossil fuels, timber, soybeans, cotton).	Assess potential ESG risks in the production, processing, and transportation stages of the commodity provided by the supplier, such as the legality of raw material sources, environmental impact during production, and protection of labor rights.