By Paul Davies and Andrew Westgate

Despite a more challenging business environment, China remains a key market for multinationals. China’s economic growth rate might have slowed, but its GDP is still rising at a faster rate than most other countries.

As China enters the next phase of its economic growth, the government continues to implement reforms designed to restructure the economy – ending the reliance on exports and turning its attention to the significant consumer markets. Beijing and Shanghai are home to the offices and manufacturing facilities of more than 400 Fortune 500 companies. With much invested in China, multinationals are facing increased competition, rising costs and more stringent regulatory compliance.

Indicative of its developing economy, the Standing Committee of the National People’s Congress in Beijing passed the first amendments to China’s Environmental Protection Law (EPL) in 2014 – the first since the law’s initial passage in 1989. The EPL amendments were followed by a number of implementing regulations promulgated by the Ministry of Environmental Protection (MEP). Indeed, several recent cases illustrate that local government is making use of the increased penalties available under the amended EPL.

MEP reported that it has imposed daily fines in 26 cases this year, totaling nearly US$2 million. During the same period, 207 businesses were ordered to cease operations and 147 companies had a manager detained by the police. For example, Ronghua Industry & Trade Company was shut down and fined 3 million Renminbi for discharging 83,000 tons of untreated waste water into the deserts of Gansu province. As a result of the amended EPL, two executives were also detained and fined, with one criminally prosecuted.

Five Practical Steps to Ensure Compliance

Increased transparency requirements, coupled with more severe penalties under the amended EPL, are game-changing developments for all businesses operating in China, including multinationals. Firms should be proactive in addressing the new law, and take steps which include:

  1. Conducting a thorough review of compliance efforts: The amended EPL requires firms designated as “key pollution entities” to disclose information on the pollutants they discharge or emit. Environmental impact assessments (EIAs) for construction projects must also be disclosed.
  2. Aligning business strategy with the areas of focus identified by the government: Under the amended EPL, daily fines are imposed not only for the cost of pollution control, but also on the damages caused in the event a company fails to make the required corrections. Previously, it was common for the cost of compliance to exceed the maximum one-time fines for violations. Therefore increased penalties for polluters will encourage businesses to step-up their compliance efforts.
  3. Engaging the local community on environmental issues: The amended EPL holds government officials accountable for environmental protection. Not only are environmental evaluations made public, but the performance of local government will be assessed with environmental goals in mind. Such change in legislation is prompting businesses to better engage with local government on how best to drive sustainable growth.
  4. Developing a crisis management plan in case of a violation or environmental incident: In light of greater penalties, businesses should be prepared to overhaul existing operations should they result in non-compliance with the EPL. In addition to fines imposed based on failure to implement required corrections, penalties also include the detention of company officers. By holding executives and other personnel “directly responsible”, refusal to terminate construction projects with the required EIA, or refusal to cease unpermitted discharges, emissions, as well as production, can led to detention of company management. Citizens and organisations will have the legal right to report breaches in environmental regulations to the authorities. Moreover, NGOs are permitted to file civil lawsuits against persons illegally polluting or causing environmental damage under the EPL, provided that they are registered with the Department of Civil Affairs and have been exclusively engaged in environmental protection activities for five or more years without any legal violations. Such penalties demonstrate that the amended EPL is focused on correcting existing business practices which lead to environmental violations.
  5. Ensuring that all interactions with government officials and state-owned enterprises comply with applicable anti-bribery laws, including US and EU laws: In particular, following the Tianjin explosions, it appears that there will be increased focus on compliance issues and corruption.

Reform Relying on Enforcement

The central government in China continues to press ahead with its environmental policy reform. Still in its nascent stage, the challenge multinationals will face in managing environmental risk will be shaped by the level of enforcement and implementation, which is expected to vary widely across the country.

If you found this interesting, you may also enjoy:

Emerging Trends in Corporate Sustainability Reporting

Five Key Considerations in China-related Arbitrations