Do you have this insurance in green?

green insurance.jpgMost of the stories about China in the Chinese English-language news services have all the analysis and objectivity of a press release. The articles concerning the recent introduction of China’s “green insurance system” by SEPA were no exception. Did any reporter consider asking “what’s so ‘green’ about industrial accident insurance?” It’s no greener than your automobile insurance. This particular insurance product will cover “environmental pollution accidents,” but that just means the insurance company and not the government will ultimately pick up the tab for compensating those injured by the accident (the operating assumption is that the corporate polluting entity will have declared bankruptcy in the wake of the accident). Its impact on ensuring environmental compliance is less clear, and, in fact, it could, perversely, lead to less corporate focus on environmental issues. SEPA acknowledges this fact, and Pan Yue is quoted as saying that merely having insurance in place “doesn’t mean polluting companies can rest assured to pollute as the insurance premium is in proportion to a company’s pollution risks.” The premium had better be set at a level significantly above the cost of compliance or the motivational power of this insurance will be nil.

The policy has only been rolled out in a trial phase and is not scheduled for nationwide implementation until 2015. First up for insuring are those “companies that produce, sell, store, transport or use high-risk chemical products” and “petrochemical industries and dangerous waste disposing enterprises that are prone to heavy and serious pollution accidents”. “Enterprises and industries having caused serious pollution accidents in recent years will be specially targeted,” Pan Yue said. I should hope so, but shouldn’t they have been specially targeted by the enforcement authorities already.

I am skeptical about the efficacy of this policy. If a company is already ignoring environmental laws, why would it now decide to comply with this directive? At most, this program will only impact the largest, most sophisticated entities-the ones, as I have noted before, that should already be in the vanguard of environmental compliance. “Green” insurance seems to be part of a suite of initiatives, including “green listings” discussed previously, that SEPA is in the process of rolling out. Structured correctly these initiatives shouldn’t do any harm, and may be marginally helpful. It seems somewhat strange, however, that given the scope of the environmental compliance challenges in China, SEPA is concentrating on implementing relatively sophisticated financial regulations. This phenomenon is simply a function of the fact that SEPA only has real authority at the macro level, and thus, its policies tend to be directed toward or, as a practical matter, only impact those corporate entities that by their size come within the purview of national regulators. But wait a minute, isn’t that the real problem here: SEPA’s lack of effective local authority? Fix that problem and there may be real progress toward meeting China’s environmental compliance challenges.

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Water Pollution Act Amendments (Penalty Box) (Part II)

water pollution.jpg As I mentioned in my previous post on this topic, the as-passed version of the amendments to the Water Pollution Prevention and Control Law assesses penalties for “intentional,” i.e. not accidental, exceedances of discharge standards based on a multiple of the applicable “discharge fee” (up to a maximum of 5x this amount).  The comment draft applied a range of set fines for intentional exceedances (up to maximum of RMB1,000,000).  I have given up trying to determine which penalty type is actually tougher on polluters because there is not enough available information to construct a justifiable typical case for purposes of comparison.  A crucial issue is how to treat chronic over-standard dischargers.  In China this will first involve an issue of proof.  Since “continuous monitoring” is only now starting to be employed in some of the more environmentally progressive areas, the fact is that most wastewater dischargers to receiving streams are not required either to sample or report on a daily basis their flows or pollutant loads or concentrations.  At best, at the start up of plant operations they measured flow and pollutant loadings and their discharge fees were based on that data (another question: if I reported over-limit discharges at plant start up and have been paying the prescribed feed for these discharges, can I now be penalized for them?  I assume not, but the law is not clear on this point).  So, let’s assume the local EPB inspectors show up at the plant, take samples, estimate daily flow rates, and determine that a facility is exceeding discharge limits, does the plant get fined only for the exceedances occurring on that day, or is an assumption made the plant has been exceeding the standards since the start-up of operations (or last visit of the EPB)?  If the assumption is, or the proof will only support, a one-day exceedance, then in almost every case, the discharge fee multiple approach will be lower than the set fine approach.   

Two things of particular note are missing from the Penalty provisions.  First, as previously mentioned, the maximum fixed fine is RMB1,000,000, and that only applies where there have been illegal discharges into a “drinking water source protection zone.”  However, the initial reports were that maximum penalties would increase to RMB5,000,000, which is starting to get serious.  Even after the comment draft had been issued, I attend and event where a high-ranking SEPA official was confidently reporting that penalties would increase to RMB5,000,000.  They didn’t. 

Second, the provisions fail to adopt anything resembling an “economic benefit” penalty as used in the US and elsewhere.  “Economic benefit” penalties attempt to recover any financial benefits a company may have obtained by not complying with the law.  These penalties are based on the premise that the polluter should first cough up any benefit it received by failing to comply with the law and then additional penalties are assessed to actually punish the illegal behavior.  It ensures that theoretically at least there can never be a situation where it is cheaper to pollute and pay fines than to install and operate the required pollution control technology.  Although calculating “economic benefit” requires some financial modeling, it’s not rocket science.  In fact I think some NGO (which one escapes me at the moment) has tweaked US EPA’s BEN model for use in China. 

Given the fact that RMB1,000,000 is still the maximum fixed penalty and there is no provision for “economic benefit” recovery, I have to assume there are plenty of companies out there who have run the math and find that its still cheaper to pollute (and at worst pay the fines) than comply.

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Green Listing (Part II)

green stock.jpg In touting the new environmental reporting obligations for listed companies (see last post), Pan Yue noted that “of all listed companies on the mainland, only half included environment performance in their 2006 annual reports. Even for those which did touch on the issue, the quality of reporting was generally poor and cannot help shareholders.”  I did a search of Chinese company environmental disclosures for a recent speech, and would certainly echo Mr. Pan’s comments.     

Many MNCs now have an “environmental stewardship” page with a picture of a man in a swamp taking a water sample while an alligator looks on appreciatively and the smokeless stacks of the factory peek up in the distance behind the Cypress trees and a link to a 900 page “sustainability” report.  In China what I soon discovered was that even when a corporation included an “environmental” section on its website it was often referring to its landscaping or even the interior elegance of its headquarters’ building.  Here’s a typical picture:

  green office.gif 

I remember this was from a chemical company’s site, but I forget what type of chemicals.  I have to assume they were in the fertilizer business because that lawn is sweet and something has really perked up the potted plants by the entrance.  As a West Virginian parking cars in the front yard doesn’t strike me as unusual, but with just one there is does give the impression that headquarters may be a bit understaffed.   

Among the better Chinese reporters was Baosteel Group which has published a thick sustainability report, the 2005 version of which received a A for “intent” and a C for overall execution from the Roberts Environmental Center, Claremont McKenna College    Unfortunately, it may be resting on its laurels.  I just checked the Baosteel website and found its “Green Baosteel” page was a little heavy on the landscape shots which perhaps explains the D- the current page receives from the Roberts Environmental Center

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Green Listing

green stock.jpgThere 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.

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Water Pollution Act Amendments (Penalty Box)

water pollution.jpg 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. . .

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MOE, MEP, EPM, 绿部?

sepa logo.jpg 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. 

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“Shame on you, KFC!”

Dirty DishesCan 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? 

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