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Since China's new environmental law came into
effect on January 1, the number of penalties imposed on domestic firms has shot
through the roof. But a closer look at what kinds of cases occur where reveals
more about which local governments are really getting serious about responsible
business.
Guo Peiyuan, co-founder and general manager
of corporate social responsibility (CSR) consulting firm SynTao, told a private
audience at the American Chamber of Commerce last week that while
energy-focused inland provinces like Henan, Inner Mongolia, Shandong and
Xinjiang had seen the most fines imposed, it was coastal Zhejiang where they
should keep an eye trained. There and in other more developed provinces, local
governments care less about fees, and the companies can afford to pay them
anyway.
Instead, Guo said, local authorities with the
political will can simply shut down plants or factories. He suggested firms
with suppliers and plants in Zhejiang vet their local partners thoroughly.
Such
ratcheting up of scrutiny – spurred in no small part
by Chinese citizens' growing awareness of environmental degradation at the
local and sometimes even national level – suggests
that corporate social responsibility and green finance have a shot at success
in China, but industry sources say they will not thrive without serious
pressure from the central government. The intensity of environmental law
enforcement in the coming years and prevalence of independently vetted annual
reports published by Chinese companies, particularly banks, will serve as
some of the best indicators of whether the government truly wants to force
domestic firms to own up to their own impact on the Chinese public and
environment.
Judgment Day may come soonest of all for
Chinese companies listed in Hong Kong, as Guo said some of the voluntary CSR
reporting guidelines issued by that exchange may not remain optional for long.
“It's quite likely that at the end of this year, some of the disclosure items
in the [guidelines] will become compulsory," he said.
Defensive
positioning
While
multinational companies with a presence in China have decades of experience
dealing with CSR demands, the concept did not make it to the national stage in
China until 2008. That year, the Chinese Academy of Social Sciences published
corporate social responsibility reporting guidelines and the State-owned Assets
Supervision and Administration Commission (SASAC) called on central-level
state-owned enterprises (SOEs) such as China Mobile, Petro China and Cofco to
be more responsible. In response, many began publishing CSR reports and
developing CSR strategies. A limited number have even been picked for inclusion
in major global sustainability stock indices like the Dow Jones Sustainability Index.
Independent
studies have shown such firms remain the exception in China. Research by Chris Marquis of the Harvard Business School and Yang Chen at
Shanghai Maritime University found that while CSR policy in China had led to an
increase in companies issuing CSR reports, this did not in turn produce better
behavior due to high monitoring costs that precluded close supervision and
verification. Marquis and Chen found that only firms that were monitored
ultimately implemented substantive reporting, and statistics gathered in recent
years suggest most Chinese businesses aren't willing to submit to independent
evaluation.
Calculations
based on figures from SynTao's latest periodic
overviews of CSR report publication in mainland China show that
343 fewer businesses put out reports in 2014 compared to the previous year.
Reports published by mainland firms listed on the Shanghai and Shenzhen stock
exchanges fell by about 14% and 17%, respectively, shrinking the total number
of listed companies that put out a CSR report last year to just 609. This drop
in the total number of Chinese firms publishing did nothing to boost
verification: Only 62 of the total 1,210 reports published in 2014 were
certified by an independent third party, for an independent evaluation rate of
about 5.1%. That marked a drop from 5.5% in 2013.
John Pabon, manager of advisory services in
Shanghai for global CSR nonprofit BSR, said that all SOEs were required by the
government to publish their sustainability efforts in some way. "Typically
it takes the form of a report, and the government will mandate by industry ‘OK,
you need to tick these boxes, and we need to see this in your report',"
Pabon said. The actual content of these reports, such as emissions figures,
pollution incidents or workplace accidents, are rarely followed up on. But,
"[t]hat’s not the government's issue. The government's issue is that they
want this report."
"Greening"
finance
That applies to most sectors, including
banking, which in China has an outsize influence on financing compared to
global markets, where firms are more likely to sell stocks or bonds to raise
capital. That means decisions on whether major projects get funded fall to
financial institutions that are reticent to do anything that might rock the
boat and scare stakeholders whose chief concern is profit.
One
useful indicator of financial institutions' willingness to actively embrace
sustainable investment is whether they agree to the United Nations'
voluntary Principles for Responsible Investment, which entail fully
incorporating sustainable business practices and disclosure into both a
business and the firms in which it invests. Currently only three mainland
investment firms – Greenland Financial Holdings Group, JD Capital
and Lunar Capital Management – have signed up. For reasons like this, Pabon said any greening of
China's major financial institutions would require a top-down, government push.
Pabon
also explained that China's increasingly complex financial sector may pose
further hurdles to holding investors responsible for where their money ends up.
When normal consumers shun traditional, low-interest savings accounts at banks
for more profitable trusts products, for example, even a small sum can be sliced
into countless slivers which can be used to help fund a variety of projects
both green and brown.
Whichever firms the money goes to, proper
disclosure remains a precondition to vetting them for best practices. Guo said
that CSR reporting in China today was largely preventative, concerned with
minimizing the potential cost of noncompliance. That failed to provide the
foundational layer of information comprised of a business's environmental and
social impact. Without this foundation, a second, interpretive level at which
judgment of a company's social value can be made remains impossible, he said.
"The
reality now is that it's always good and it's important to see the early
movement for disclosure toward layer-one information," Guo said. "But
it's far from enough, and at the same time, most of the traditional market
players – particularly the financial analysts – they don't care about this information because
it's not material enough."
New
players to the game
The new environmental law that went into
effect on January 1 could potentially bring significant change to China's CSR
sphere by upsetting this status quo. Guo said the key problem is that companies
already know what to expect from regulators—i.e. lax enforcement of any laws
that could pose a threat to economic growth. "The mouse already knows how
the cat plays [the game]," he said.
The
ability of some NGOs in China to sue polluters under the country's new
environmental law may be forcing firms to deal with another feline entirely.
The first 100 days under the new policy regime saw four lawsuits from NGOs against
polluters. That sounds low, but compared to the total of nine cases from 2009
to 2013, it's litigation at a blitzkrieg speed.
One
factor in this increase in lawsuits and regulatory penalties may be the
Ministry of Environmental Protection's new head, Chen Jining. The former Tsinghua University President with
a doctorate in environmental science and engineering has his work cut
out for him proving his ministry is no longer so far removed from the concerns
of ordinary Chinese citizens as it was under his predecessor, Zhou Shengxian.
(Zhou once told China Daily that it
was "a disgraceful lifestyle to drive a BMW but have only dirty water
to drink.")
For
many years, a lack of any consequences has kept most firms in China from
bothering to match their real-world performance with what they put down on
paper. The next few years will provide all the evidence needed to tell whether
that wanton attitude will remain the norm, or if CSR reports will become
Chinese firms' first line of defense against intensifying scrutiny from the
top.
Author:
Hudson Lockett
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