China has no shortage of environment and sustainability-related policies, regulations and legislation. These stretch from environmental laws focusing on air, water and waste, energy efficiency, renewable energy and carbon intensity targets in the country’s Five-Year Plans (FYPs) to green finance guidelines, corporate social responsibility (CSR) reporting recommendations and numerous locally announced regulations. Multiple layers of central, provincial and municipal governments are involved in developing and implementing policy and regulations. On paper, they form a complex yet fairly well-defined regulatory system covering most aspects of sustainability and good environmental practices.
While the regulatory landscape continues to evolve and gain greater definition, the key problem associated with the Chinese regulatory environment is not one of policymaking. Rather, the challenge lies in how these policies are implemented and enforced, the effectiveness of which will be crucial in generating significant and sustainable behavioural change within companies.
Take the energy efficiency targets of the FYPs as an example. China’s FYPs are issued every five years, with those announced in early 2011 being the 12th cycle of FYPs. They are blueprints laid out by the central government setting out its overall objectives and goals as they relate to social and economic growth and development, and industrial planning in key sectors and regions. Unfortunately, little information is given in terms of how the national target is to be split and allocated across provinces and cities, and even further down to the industry or sector level. Nor is there any detail as to how the government will measure and monitor the achievement of these targets or penalize missed goals. This is particularly troublesome for foreign companies, as many of them don’t know what targets they should be trying to meet. The fluidity of the enforcement process can also mean loosely defined targets announced in one year may become more rigorously and retroactively enforced in the next.
The Chinese government is beginning to address this problem. The Ministry of Environment recently established four regional supervision centres for environmental protection, specifically targeting improvements in the monitoring and evaluation of environmental regulation implementation. However, the lack of clarity that remains in the market still requires companies to have appropriate contingencies built into their business plans to manage possible regulatory risk exposure.
Looking into the future, it is expected the regulatory environment supporting sustainability considerations in China will continue to mature rapidly, requiring companies to foresee upcoming changes and consider the corresponding risks strategically when making business decisions. For instance, while China currently does not have a soil contamination law, draft legislation has been under review by the state council for several years and is likely to be published soon. Companies acquiring new land will need to consider soil contamination risks during the due diligence process and correctly reflect this in the deal structure at the time of contract. Otherwise they may face the possibility of significant compliance costs as a result of pollution liability once the law is announced.
John Barnes is a partner in PricewaterhouseCoopers’ (PwC) risk and controls assurance practice. He joined PwC’s Beijing practice in 2005. He is responsible for managing key clients of risk and controls solutions in PwC China.
