This post was co-written with Hua Wang, an intern with WRI.
Hu Tao is a Senior Associate in WRI's Institutions and Governance program. Prior to joining WRI, he was the Senior Environmental Economist at the Policy Research Center for Environment and Economy (PRCEE) of the Ministry of Environmental Protection (MEP) of China.
Few countries are unaffected by China’s overseas investments. The country’s outward foreign direct investments (OFDI) have grownfrom $29 billion in 2002 to more than $424 billion in 2011. While these investments can bring economic opportunities to recipient countries, they also have the potential to create negative economic, social, and environmental impacts and spur tension with local communities.
To address these risks, China’s Ministry of Commerce (MOFCOM) and Ministry of Environment (MEP)—with support from several think tanks—recently issued Guidelines on Environmental Protection and Cooperation. These Guidelines are the first-ever to establish criteria for Chinese companies’ behaviors when doing business overseas—including their environmental impact. But what exactly do the Guidelines cover, and how effective will they be? Here, we’ll answer these questions and more.
How Big of a Deal Are China’s New Guidelines on Environmental Protection and Cooperation?
The Guidelines set basic principles for Chinese companies to integrate environmental protection into their corporate governance strategies and address the concerns of host countries’ governments and communities. This is the first time that the Chinese government has made explicit, progressive, and across-the-board environmental and social rules for Chinese overseas investments. The previous rules were partial, implicit, and general. It is also one of the very few national policies in the world that govern environmental performance of overseas investments. In this regard, we welcome the Chinese government’s initiative to direct its companies into environmentally and socially responsible governance.
Do the Guidelines Work?
These Guidelines seem to mainly target the big State-Owned Enterprises (SOEs), who have done much better in addressing social/environmental impacts than small and medium-sized private companies—not only in their overseas business, but within China. Companies with the worst social/environmental footprint are the small and medium-sized private companies that invest in Africa or in ASEAN countries. These companies tend to have poor reputations domestically as well. In China, large companies tend to pay more attention to their image than small or medium-sized businesses, largely because of their close ties to government. MOFCOM and MEP are targeting the SOEs with the new Guidelines because the moral obligation factor that works for large companies won’t necessarily work for smaller companies.
How Can the Guidelines Go Further?
The current guidelines are voluntary, rather than required. This is just a soft, moral regulation—if companies don’t do anything with them, nothing will happen to them. When my colleagues and I were working on the Guidelines, we tried hard to make them mandatory. We wanted MEP to have the authority to manage Environmental Impact Assessments (EIAs) and environmental standards for companies doing business overseas. After negotiating with MOFCOM, we had to make some compromises, so we started with voluntary guidelines first. In the future, China may have mandatory guidelines.
If the Guidelines aren’t effective in improving companies’ social/environmental impacts, MEP and MOFCOM may consider binding measures, such as mandatory-based guidelines. In China, the Environmental Impact Assessment (EIA) Act covers companies within Chinese boundaries. One possibility is to extend the EIA Act beyond the Chinese boundary to cover companies doing business overseas.
During the last National People’s Congress in March, under our technical support, a bill was submitted by one of the delegates of the Chinese People's Political Consultative Conference (CPPCC) that would authorize the National People’s Congress (NPC) to extend MEP’s oversight to Chinese companies overseas. The draft bill is in process, and relevant ministries from MEP and MOFCOM are being asked for feedback. While we want mandatory guidelines in the future, we currently don’t have a legal basis to do this. We are now hoping NPC can authorize ministries to extend the EIA Act to Chinese companies overseas.
Should Chinese banks also have similar guidelines for providing financial support for companies’ overseas investments?
The last article of the Guidelines refers to multi-lateral financial institutions, implying that when companies borrow money from commercial banks, these banks would also be encouraged to adopt the Guidelines. The Green Credit Directive by the China Banking Regulatory Commission (CBRC) also has a special article that mentions that banks providing money to companies overseas should have environmental guidelines, but there is no specific language on what these guidelines should look like. Future guidelines on green credit for business operations overseas should be similar to any Guidelines from MEP/MOFCOM.