Green Listing

There were a series of articles last week regarding 10 IPO applications that were “rejected because their performance had failed to meet government standards or because their reporting was inadequate.”.  The rejections were based on regulations issued by SEPA and the China Securities Regulatory Commission (CSRC) going back to 2003, but this news was coupled with the fact that SEPA has issued a new “Guiding Opinion on Strengthening the Supervision and Management of Environment Protection of Listed Company” (Chinese version here) which imposes environmental reporting obligations upon companies that are already listed.  

As Pan Yue, deputy director of SEPA, noted “now that the practice of environmental disclosure in the IPO process has become more or less established [based on compliance with the regulations issued in 2003 and thereafter], it is time to tighten disclosure rules for companies that listed before environmental impact became a required reporting item.”  Thus, among other things when one of the following events happens that can affect the trading price of a company’s listed shares the company must disclose them: 

● Any newly promulgated environmental law, regulation, rules or industrial policy that may significantly affects the company;

● The company is investigated, criminally punishment, or a major administrative punishment is imposed by the environmental administration due to any violation of environmental laws or regulations;

● A major investment such as new building, renovation or expansion project will have significant environmental impact;

● A company operation has been ordered to correct an environmental violation within a specified period of time or be shut down;

● The company is involved in an major lawsuit involving environmental issues and its main assets have been frozen, mortgaged or pledged; 

● Any other major events set forth by Measures for the Disclosure of Environmental Information that may considerably affect the trading price of a listed company’s shares.  

These moves are in line with other recent efforts (including the Measures for the Disclosure of Environmental Information which are cited in the last bullet point and become effective on May 1, 2008).  Remember though that rules applicable to listed companies only catch the low hanging fruit.  Companies large enough and sophisticated enough to list on a domestic exchange should be in the vanguard of environmental compliance efforts.  It’s a little distressing that 27% of the IPO applications reviewed failed to meet the environmental compliance standards.  Imagine what the compliance percentages must be in the hundreds of thousands of companies too small and too parochial to consider listing.

Water Pollution Act Amendments (Penalty Box)

 China’s Water Pollution Prevention and Control Law was amended on February 28 by the Standing Committee of the NPC (Chinese version here; English translation of Penalty section here; full English translation on its way).  I’ve only had a chance to briefly skim it, but new penalty provisions are getting the most press, so I’ll give you my first take.  Three penalty changes merit comment.  First, a provision (in Article 83) has been added (it was not in the draft law submitted for public comment) which is translated by Xinhua as: “Enterprise heads directly responsible for causing severe water pollution incidents and others with direct responsibility will be fined up to half of their income of the previous year.”  My read is that it is not “enterprise heads,” but those “directly responsible” (对直接负责的主管人员和其他直接责任人员) for an accident which causes water pollution who risk the salary hit.  Thus, rather than the CEO, it can be some lower level employee who takes the rap (it’s possible a non-penalty provision of the act imposes “responsibility” upon CEO’s for water pollution matters, if so, I’ll update).  In addition, as a number of my Chinese colleagues and others have pointed out, the actual booked salary for many employees (upon which this penalty will presumably be based) may not be, how shall I put it, a significant percentage of an employee’s total compensation.  Foreign invested company employees will be more vulnerable on this one.  It should also be noted that Xinhua’s “incident” (事故) really translates as “accident.”  In other words, salary penalization could come into play for a Songhua River type spill, but it will not apply to the day-in, day-out normal operational exceedance of applicable water limits.  

This brings me to the second point, Article 83 also provides: “In the event of any insignificant or relatively large water pollution accident, a fine equal to 20% of the direct losses caused by such water pollution accident shall be imposed. In the event of any serious or exceptional serious pollution accident, a fine equal to 30% of the direct losses caused by such water pollution accident shall be imposed.”  This provision was in the draft released for comments.  Note again it only applies to “accidents,” not routine exceedances.  In the case of the Songhua River spill a fine equal to 30% of the direct losses would have been huge, so this provision, if applied, could have some bite.  One caveat, it is unclear what is exactly meant by “direct losses.”  Are the drafters trying to exclude “consequential” damages?  Hard to say.  I think it is fair to conclude that the provision excludes what would be considered “natural resource damages” under US Superfund law.  In other words, the “value” of fish and birds, for instance, killed as a result of the pollution accident will not be considered part of the “direct loss” base amount unless someone can claim he made his livelihood catching them and that livelihood has been harmed.  Unlike the US, fish and birds have no inherent monetizable value in China.  

Third, the maximum quantified penalty set forth in the amendment is RMB1,000,000 (Article 75) (which is pointed to as a great leap forward), but it only applies to the most obdurate of polluters.  The entity must illegally discharge into a “drinking water source protection zone” and fail to heed the orders of regulators to stop.  Then and only then do the RMB1,000,000 penalties kick in. For the chronic violator who discharges into an ordinary receiving water, the penalties are as follows: Article 73 provides for “fines equal to 100% and 300% of the payable waste discharge fee” for failure to use installed pollution control equipment; and Article 74 provides for “fines equal to 200% and 500% of the payable waste discharge fee” who exceed applicable categorical or water quality standards.  These penalties represent a change from the comment draft which applied fixed penalties of from RMB50,000 to RMB500,000 for the Article 73 situation, and from RMB100,000 to RMB1,000,000 for the Article 74 situation.  Although I will have to do some cipherin’ and make some assumptions to know for sure, my sense is that on average the enacted versions penalties will be lower than those proposed in the comment version.   More anon. . .

MOE, MEP, EPM, 绿部?

 Looks like the State Environmental Protection Administration (SEPA) will finally join the big boys.  Foreign press reports (it still has not been officially reported in the Chinese press) state that The National People’s Congress (NPC) will vote this month to elevate SEPA to full ministerial status.  SEPA has for the past ten years occupied a political twilight zone where it was considered a ministerial-level agency, but its minister, Zhou Shengxian, was not a standing member of the State Council.  Soon, he will be (barring any adverse fallout from this).  In addition, SEPA will reportedly receive a larger budget and more staff, perhaps doubling the size of the agency over the next several years (perspective break: that means going from the current 200 employees to maybe 400). The largest impact of this change will be at the macro-policy level.  SEPA’s perspective will finally be consistently heard when the Standing Committee discusses and crafts regulatory policy and directives. 

SEPA will not be wresting any environmental powers away from other ministries such as the National Development and Reform Commission or Ministry of Construction, but the existing patchwork of agencies with environmental portfolios does not differ significantly from many other countries.  This move will have little immediate effect on the environmental enforcement ground game; SEPA is not slated to receive any greater control over local Environmental Protection Bureaus (EPBs).    

Its actually a little surprising it has taken this long to elevate SEPA to full ministerial status– every domestic and foreign expert who has looked at environmental governance in China over the last 10 years has recommended this relatively simple step.  I have used the failure to empower SEPA in the past to argue that there were still forces within the national leadership structure who weren’t fully on board with the “green” face others at the top were presenting to the public.  I’m glad to see that perhaps this group is starting to lose some of its obstructionist power.   I sort of like the acronym “SEPA” – easy to pronounce, vaguely organic – but it won’t work for the Ministry of Environment.  The opportunity to create a new English acronym for a Chinese agency doesn’t come along often readers, any suggestions?  Does MOE work for you?  

P.S. The reports also indicate that the rumored “Ministry of Energy” will not be created during this session of the NPC.  That news isn’t surprising; what I found surprising was that some people were actually predicting a March (2008) kick-off date for the new . . . MOE, uh oh, I fear acronymic confusion. 

“Shame on you, KFC!”

Can Corporate America sink any lower? There’s plenty of muck to be raked in the China stables of US companies if this horrific headline is to be believed. 

KFC Gives No Satisfactory Explanation For Dirty Plate

OK you ask, surely there’s more to this story and why is it being featured in China CSR?  Well folks that pretty much is the whole story, except there may have been several plates and the “dirt” was a “stinky yellow filth.”  KFC has offered compensation and an apology, but the diners’ demands to have the “stinky yellow filth” identified have so far not been satisfied.  My advice (since no one appears to have gotten sick): forget about getting that explanation.  Sure, I want to know what that black scaly thing was in the white rice my daughter purchased last week from our local noodle house, but that knowledge isn’t going to make anyone feel any better. 

More importantly what does this incident have to do with Corporate Social Responsibility?  I thought the premise of CSR was that corporations should consider the interests of all impacted stakeholders, not just the economic interests of shareholders, when operating their businesses.  Surely such time-honored, profit-driving concepts as “the customer is always right” would provide a satisfactory response to all involved in this incident.  After all the premise behind that aphorism is that the customer is occasionally, in fact, mistaken, irrational, and/or larcenous, but our business interests will be better served if we act in a way that enhances customer loyalty.  I suppose such long-term perspectives are not as current these days, and maybe that is a concept CSR attempts to push back into the equation.  However, if the definition of CSR is expanded to the point where it suggests responses where traditional profit-making motives should suffice to accommodate all stakeholder interests, doesn’t it risk diluting, or worse, trivializing, its impact? 

NIMBY with Chinese Characteristics

 Nice take on the rise of NIMBYism in China here: Not in My Backyard: China’s Rising Middle Class Growing Environmental Contention    I noted this phenomenon in the article, “Who’s Cleaning up this Mess?” linked to the right.  The reports of riots by peasants to stop discharges of highly toxic pollutants from neighboring plants have been around for years.  In most of these cases, there were demonstrable adverse health impacts (high infant death rates, large numbers of birth defects, etc.) caused by the pollution, and the violent reactions of the powerless victims could be viewed as the only avenue of self-defense.  The difference in this new breed of public protest is that they are decidedly less violent than the old forms and based on fears of prospective adverse health effects and loss of property value.  In my view these new protests are rather optimistic expressions of a belief that the “voice of the people,” peacefully channeled, will be heard.  I think this is good news for China.  In some cases simply complying with existing rules regarding public participation in the Environmental Impact Assessment (EIA) process could diffuse the situation.  To completely address the problem, the public participation rules need some tweaking (but the tweaks are neither substantial nor particularly controversial) and they need to be consistently followed.  These changes can be accomplished.  The inevitable clashes of interests should not be feared, and, in most cases, can be, dare I say it, “harmoniously,” resolved through implementation of a fair and transparent construction project approval processes.  Am I too sanguine?

欢迎环境Blog!

There is so much to cover, where to start? Well for starters we will try to avoid repeating the same shop worn statistics, e.g. “20 of World’s top 30 most polluted cities,” that are often trotted out when talking about Chinese environmental matters. The numbers in the quote vary, but the lack of attribution is a fairly consistent feature of this type of hyperbolic “statistic.” What type of pollution are they talking about anyway, and how do you weight various pollutants to determine “most” polluted? Oh well, we’ll try to stick to the facts and the law to the extent they can be determined (more on this point later), keying off of current news items and emerging story lines. This blog is obviously in English, and I am not Chinese. There are plenty of wonderful bloggers addressing these same issues in Chinese; I hope to link to some of these. This blog exists primarily for those who may not be able to fully engage with the Chinese blogs. I hope, however, that everyone will feel welcome to contribute here.