Managing Environmental Impact
International Experience and Lessons in Risk Management for Overseas Investmentsby , , and -
This working paper consists of six case studies, includes an array of sectors, and draws experiences and lessons from these case studies. It provides take-aways for Chinese companies investing overseas and suggestions for Chinese government organizations, financial institutions, NGOs and media.
China’s outward foreign direct investment (OFDI) has been increasing dramatically. During the 2008-2009 financial crisis, global foreign direct investment (FDI) decreased by 40%, whereas China’s OFDI increased by 8% (UNCTAD, 2013). In 2012, Chinese investors invested US$77.22 billion in 141 countries and regions, an increase of 28.6% over 2011 (MOFCOM, 2013). In the post-financial crisis era, Chinese companies and banks provided funds to countries that were short of money but eager to develop. In these countries, Chinese investments have been generally welcomed, but they have also led to some concerns. For example, Chinese investors invested in some high-risk environmental projects, including some that had been turned down by other investors due to high risk. Environmental impacts can cause turmoil and lead to criticism from communities and host country governments, thus jeopardizing projects. Chinese investors are faced with the responsibility and challenge to protect the environment in the countries hosting their investments while promoting local economic development.
Multi-national companies from other countries have also experienced some of the same issues that Chinese companies are facing now. Through years of investment, these companies have garnered experiences and lessons regarding the environmental and social risk of foreign investment. Chinese companies can utilize these experience and lessons to create opportunities for their own investments and risk management systems. WRI conducted six case studies, each focusing on a non-Chinese multi-national company, and used an integrated analytical framework to analyze environmental and social risk management. This analysis has shown that strong environmental and social risk management can benefit companies, while weak risk management can result in profit losses and reputational damage.
This working paper consists of six cases, and includes an array of sectors. The cases are summarized below:
In the 1960s, the US company Freeport-McMoRan Copper and Gold Inc. began mining in Papua, Indonesia. Freeport’s investment began during a politically tumultuous era. Its investment is also associated with widespread human rights violations and environmental degradation in Indonesia’s remote and impoverished areas. With increasing pressure from the international community and local tension erupting in the 1990s, Freeport eventually redesigned the way it handled environmental and social issues. Although Freeport has now greatly reduced its environmental impact and brought benefits to the local communities, the effects of the difficult situation from the previous era are still seen today, and violent situations still occur.
Australian BHP Billiton entered Papua New Guinea in 1981 to explore the Ok Tedi copper mine. In the ensuing 17 years, the waste from the copper mine polluted the nearby Ok Tedi River and Fly River basin. The international community exerted great pressure on BHP Billiton, contributing to the company withdrawing its investment in 2001.
Newmont Mining Corporation, a US company, developed Ahafo Mine Project in Ghana in 2003. From 2005 to 2006, the project led to nearly 10,000 homeless or relocated people. Three years later, a cyanide spill in a nearby river led to widespread deaths of local fish populations. Although Newmont paid significant attention to environment and social impacts, this project still caused considerable impacts.
Malaysian Sime Darby invested in the palm oil industry in Liberia. The Liberian government and Sime Darby signed a franchise agreement giving Sime Darby the right to use 220,000 hectares of land in 2009. Lack of clarity over land ownership led the government to represent local communities and residents in negotiations with Sime Darby to gain support for the project, but it created tension between Sime Darby and local communities. It hindered the progress of the project, leading to huge financial losses.
Asia Pulp & Paper (APP) is one the world’s largest pulp and paper companies; its projects have contributed to large-scale deforestation in Indonesia. Since the 1990s, APP operations both directly and indirectly led to conflicts among local communities, exacerbation of climate change, and destruction of local vulnerable species habitats. Through the efforts of NGOs, large downstream enterprises boycotted APP, which led to significant financial loss. This pressure led to APP’s commitment in February 2013 to use sustainable development best practices.
The Camisea Natural Gas Project is Peru’s biggest energy project. The project is financed by a consortium led by Argentina PlusPetrol with additional funds from international financial institutions. Although both the Peruvian government and the Inter-American Development Bank established detailed environmental regulations and “security” policies, the consortium only took partial responsibility for environmental protection and stakeholder communication. Located in an ecologically sensitive area in Peru, the Camisea project is one the world’s most controversial natural gas projects.
This working paper draws experiences and lessons from these case studies and provides take-aways for Chinese companies investing overseas, as summarized below:
Companies should carefully study and abide by host country laws. If the host country’s legal system is weak or unclear, the company should ensure that their own social and environmental standards are strong. The first basic step of a company’s risk management policy should be to abide by host country laws and seek professional legal advice. Many Chinese companies’ resource and land investments are located in areas where environmental protection laws and government regulations are still improving, and companies should be cautious about risk when investing in such areas. One effective way to address risk is to go above just obeying host country laws. For example, companies should take initiative to improve their own standards so as to reduce the negative environmental and social impacts of their operations.
Companies should fully understand a host country’s political and cultural background, and be prepared to address various types of situations. At the beginning of China’s “going out” phase in the 2000s, Chinese companies applied their Chinese business practices overseas. However, each culture has its own way of working, and companies should adopt new methods to solve problems. This includes employing professionals who understand local culture and promoting communication between companies and local stakeholders.
Companies should actively coordinate with different stakeholders to obtain greater understanding and support from local communities. Companies should learn to work with a host country’s central government as well as local governments, communities, business partners, and media. In the process of gaining community support, companies should understand that unilateral compensation and investment in communities without consultation will not guarantee successful implementation of projects. Companies should ensure that information is available and transparent to all stakeholders and establish grievance mechanisms to ensure that local issues will be addressed.
Companies should join leading international industry organizations and adopt industry best practices to reduce environmental and social risks. Best practices will also assist companies to reduce the probability of negative environmental and social impacts, therefore reducing risks. They will also demonstrate to companies how to actively respond to situations, and reduce the risk of reputational damage and financial loss.
In addition, this working paper provides suggestions for Chinese government, financial institutions, NGOs and media, as summarized below:
The Chinese government should include the impacts of overseas investments in its domestic environmental management system to protect the national reputation. Possible approaches include upgrading current environmental policies for overseas investments to enforceable laws or regulations, applying current laws or regulations for domestic investments to overseas investments, and strengthening regulation for corporate social responsibility reporting. In particular, some industries with potentially large environmental social impacts, such as large-scale infrastructure and mining, would benefit from further guidance and instruction from the government.
Chinese financial institutions can enhance their knowledge of environmental and social risk management from leading multilateral development banks as well as directly learning about international practices by co-financing projects with these institutions. When providing loans to companies or projects, financial institutions can improve their own environmental and social risk management policies and prevention systems to encourage companies and other financial institutions to adopt better environmental and social risk management systems.
Chinese NGOs can build bridges between investors and local communities. NGOs can also promote strong environmental and social performance in host countries, leading to an increase in positive contributions and a reduction in negative impacts.
Chinese media can strengthen cooperation with foreign counterparts to raise awareness among local people, NGOs and local media. Media can also contribute to on-site investigation to protect the local environment and communities through fact-finding.
This working paper follows the World Resources Institute’s 2013 publication, Environmental and Social Policies in Overseas Investments: Progress and Challenges for China. We will continue to study the environmental and social impacts of China’s overseas investments. In our next publication, we plan to focus on Chinese foreign investments and analyze the standards and practices applicable to environmental and social risk management.