This article is also co-authored by Johnny Browaeys, Director of Corporate Services, Greenment Environment
The thousand cuts ….
On October 18, 2017, President Xi Jinping, in a three and a half hour speech to the Party Congress emphasized that building an ecological civilization is necessary for the continued development of China. He chose his words carefully:
“The damage that humanity does to nature will ultimately harm humanity itself – this is an unavoidable rule.”
This announcement, together with the latest in a series of central environmental inspections covering 30 provincial regions has ushered in an era in which the environment is at the forefront of enforcement action. In a centrally-led enforcement campaign as far-reaching as anything that the government has undertaken, over 5,700 officials have been nabbed and over 30,000 companies have been penalized. The campaign was a massive coordinated effort between central inspection teams and a multiplicity of local government authorities. The government has committed to rolling out the inspections on an ongoing biennial basis, to address the ever-present risk of environmental relapse, with the next phase targeting air pollution in the Hebei-Beijing-Tianjin triangle.
But the campaign's impact, felt so keenly by local government officials and corporations alike, would be nowhere near as severe if not for the new tools that have been placed in the hands of the inspectors through recent legislative action.
A while coming….
Few people at the time fully appreciated the significance of Premier Li Keqiang's declaration of war against pollution following the 'airpocalypse' experience in Beijing several years ago. But it set in train a series of measures that reversed the sense of helplessness and apathy that had come to be associated with environmental protection in China. The ramp-up of environmental targeting in the central government's five year plans, the issuance over the past few years of very focused environmental policy action statements – the "Air Ten", the "Water Ten" and, most recently, the “Soil Ten" – and the issuance of long-awaited laws and regulations with teeth, provided a clear sign of what was to come.
But it was the amended Environmental Law, which came into effect without huge fanfare at the beginning of 2015, that promised to change the status quo that has so long favored “growth at any cost”. It did so by providing enforcement authorities with a greatly enhanced set of enforcement tools, aimed not only at environmental infringers, but also at corporate senior managers and regulators. The most potent of these measures changed the basis of fining infringers from a 'per event' basis to a daily basis, drastically altering the "pollute vs comply" equation. Responsible senior managers could be thrown into administrative detention for up to 15 days at a time for repeated infringements by their company. And in associated rules, the career advancement of government officials was made contingent on environmental performance. To round out the key changes, freed from the pre-requisite to demonstrate some sort of loss or damage, a number of NGOs became qualified to bring environmental lawsuits.
NGOs also drive compliance through other methods. On 13 October, the Corporate Information Transparency Index (CITI) was released at the 2017 China Green Supply Chain Forum by the Institute of Public & Environmental Affairs (IPE, China’s most reputable environmental NGO). It accorded CITI performance/scores to approximately 260 brand-name companies. Most of the multinational companies that attended the forum expressed their concern with the increasingly stringent environmental regulations and ensuing enforcement, which meant more risks and challenges for their supply chain management. Some companies shared their countermeasures and proactive actions and others admitted that they lacked both experience and resources to make their supply chain compliant.
Such changes represent a fundamental shift in environmental philosophy. Prior to the amended Environmental Law, environmental authorities focused on up-front approvals, with environmental impact assessments, and construction approvals, taking up most of their attention. Now the emphasis is on corporate operational compliance, and its responsible oversight.
The law provides tools. But without underlying unequivocal policy support, it struggles as an instrument of social change. It has become clear in a succession of policy initiatives that environmental enforcement is here to stay and indeed has taken centre stage, having been put on a par with anti-corruption as a government's priority. What we are therefore seeing is an elusive convergence of two critical factors underpinning implementation. Other contributing factors are coming together too, such as the build-up of numbers of trained staff in the environmental authorities, and the proliferation of specialist environmental tribunals within the court system.
One need not look further than the mighty packaging company Tetra Pak to understand how much local government attitudes towards development have changed. Twenty-six years ago, when Tetra Pak wanted to set up shop in southern China, the government of Foshan offered a plot on a new industrial park a few miles out of town.
Tetra Pak accepted, and its factory thrived. It became the dominant local packaging firm, with a 90% share in China’s beverage paper packaging market at one point. And for many years, it was Foshan’s largest taxpayer.
But Foshan today is not what it was 30 years ago. The population has doubled and the city has spread. Tetra Pak’s once out-of-town factory is now surrounded by residential communities worried about air pollution. This summer, after years of lobbying by angry locals (and a US$100 million antitrust fine by the Chinese authorities last year), Tetra Pak shut the plant. Production, it announced, would transfer to its three other factories in Hohhot, Kunshan and Beijing.
The enforcement wave does not distinguish between foreign and Chinese corporations. Enforcement actions have led the phone lines of the foreign commercial chambers and other professional business organizations to ring hot with calls from affected member companies, urging the chambers to organize working group sessions for members to share experiences and recommendations on how to address the “environmental wave”. As a result, corporations have started to perform their own ‘self-environmental audits’ to gain a greater level of comfort in the new environment.
Skeptics may question whether environmental compliance will retrogress as soon as the central inspectors have returned to Beijing, and localities will return to the 'growth at all costs' approach. But another law that just came into effect is designed to nip this risk in the bud. The Environmental Tax Law turns discharge fees into a type of tax, and takes monitoring and collection out of the hands of local authorities and into the hands of joint platforms set up by tax and environmental bureaus. This means that local governments will bear great risks if they continue skirting around environmental law by waiving or subsidizing the payment of discharge fees of favored local companies. The environmental equation now favors environmentally responsible companies over polluters. And private investors are recognizing the business prospects for environmental technology as a result, especially with the proliferation of carbon financing options entering the market.
Supply chain compliance – a hard nut to crack
Indirect vulnerability arising from one’s own supply chain appears to be a risk that is more elusive but no less important.
On September 19, Dr. Zhang Yilin, CEO of Schaeffer Group Greater China, sent a note to the Pudong and Jiading governments asking them to allow their steel wire supplier to continue operations for another three months in order to find alternative suppliers for their production, estimating that the damage arising from the shutdown of this one supplier to Schaeffer and subsequent companies in the value chain could amount to 300 billion RMB.
Corporations that pro-actively engage their supply chain to enhance their awareness and compliance have proven to be able to weather the environmental storm more effectively. Other corporations have started screening their suppliers to better understand their indirect vulnerability.
Soil remediation - the next frontier
Most efforts to date have been to tackle air and water discharge pollution, with the most insidious of all pollution, soil and groundwater contamination, generally placed in the 'too hard' category. Several years ago, a leaked survey of the extent of the nation's soil contamination shone a spotlight on the problem that has been hard to shift. The central government eventually issued the "Soil Ten" policy action plan which committed to the enactment of a "Law on Soil Pollution Prevention and Control" (“Soil Law”) in due course, rectifying the fragmented state of regulation over this area.
True to its word, a Soil Law is on track to be promulgated next year, and in advance of that, temporary rules that give authorities to test the various concepts that will be introduced by the law, have been issued. These rules, the "Measures on Soil Environmental Management for Contaminated Sites”, announced by the MEP on December 31, 2016 and in effect from July 1, 2017, mandate the sealing off or remediation of sites targeted by the government as those already at most risk of contamination.
The Remediation Rules have kicked off a process whereby 'the polluter pays' principal will gradually become entrenched in the consciousness of polluters in China. A more systematic approach to surveys and enforcement promises to help address deep concerns in the population about the quality of locally sourced food and water. As the consequences of environmental contamination become quantifiable and acknowledged by the new environmental courts, companies will begin to seek apportioning liability, which will lead to the growth of environmental insurance products and render the application of environmental technologies more attractive.
So what you should look out for to manage your risk?
Companies should, in conjunction with their environmental assessors and legal counsel, audit themselves to guard against the following red flags that will be picked up in an investigatory visit by environmental officials:
- Absent or incomplete EHS permits
- Non-compliance with land use or industrial policy
- Inadequate environmental protection facilities
- Hazardous waste disposal by unlicensed parties
- Any soil or ground water contamination
- Noxious odors such as VOCs
- Outstanding fees or fines
- Disputes with neighboring residents or facilities
- Occupational health or safety compensation issues
- Media or NGO exposure for non-compliance
The rigor of the current environmental enforcement environment is highly likely to prevail. Proactive self-assessment with periodic follow ups, combined with a strong compliance policy is the best way to both guard against nasty surprises, and to have a ready defense demonstrating that a company has robust environmental compliance policies.
China may not be able to save the world, but there is still time for China to save its own environment. And in initiating an era in which environmental enforcement is the ‘new normal’, China will be making a massive contribution to improving ecosystems far beyond its own borders in the years to come. Western companies will in the main weather the inconvenience, and emerge from the initial investigatory shock in a stronger market position. As playing fields are leveled through the increase in costs to polluters, and as other areas of problematic enforcement, such as IP protection, are addressed, compliant Western companies will be better placed to compete on their own terms, and to prosper.