China: the path to responsible business and sustainable growth
On February 24, China's banking regulatory commission released its green credit guidelines, securing China's global leadership in advancing environmental principles and rules across its banking sector. Uniquely covering corporate as well as project finance, the guidelines are mandatory and establish the basis for oversight of the financial sector's handling of environmental issues, explicitly linked to licensing arrangements. Implementation will undoubtedly be a slow and challenging process, but let no one doubt the seriousness of this move.
A report I co-authored about corporate responsibility in China: Corporate Responsibility and Sustainable Economic Development in China, is launched today. The report's core target audience is an international community unclear as to how best to understand and respond to the changing Chinese narrative on sustainability and responsibility.
Should China's visible embrace of what it domestically refers to as "corporate social responsibility" be interpreted as "grand greenwash", or at best a side activity of marginal relevance to business behaviour and China's development. Or might the rhetoric be part of a substantive strategy to move China towards becoming the world's leading green and inclusive economy. The report concludes that whilst there are inevitably examples of the former, broadly comparable to international experience, it is the latter option that best describes current developments. Responsible, green business practice is a pre-condition for China's domestic stability, its moral mandate as an emerging super-power, and hopes for a more sustainable global economy that is currently in environmental freefall.
An ambitious plan
China's 12th five year plan sets out ambitious intentions for advancing a more balanced domestic economy, framed by out-going premier Wen Jiabao's characterisation of the current economic model as "unbalanced, unstable, uncoordinated, and unsustainable". Evidence of the seriousness of China's stance includes its commitment over the plan period to invest in environmental protection to the tune of US$450 billion, and to put an extra US$450 billion into renewable energy and US$600 billion into smart grids. Ambitiously, it has recently announced plans to pilot seven domestic carbon markets in Beijing, Tianjin, Shanghai, Chongqing, Shenzhen, Hubei and Guangdong, covering hundreds of million of people, and hundreds of thousands of companies.
Alongside macroeconomic and fiscal measures, the Chinese Government has steadily raised the regulatory stakes in what it expects from business. In 2006, new company law stated, "Corporations in their business operation must abide by the laws, regulation, social and business morality and good faith rules, must accept supervision by government and the public, and must undertake social responsibilities." In 2007, the Ministry of Commerce (MOFCOM) issued the circular on enhancing environmental surveillance on exporting enterprises to restrict socially irresponsible enterprises from conducting foreign trade. In 2008, the state-owned assets supervision and administration commission of the state council published the guidelines on CSR fulfilment by central-level enterprises. These guidelines (which are, in effect, mandatory) present CSR as the way for state-owned enterprises to contribute to China's national development goals.
Growing numbers of best practice
Internationally, China as a member of the UN Human Rights Council recently, and perhaps to some unexpectedly, endorsed the UN guidelines on business and human rights, which provides a framework of principles on the state duty to protect human rights, the corporate responsibility to respect human rights, and the need for remedy when corporate-related abuses have occurred. Despite China's caution toward international standards, it eventually signed-off on ISO's new CSR framework, ISO 26000, and plans to adopt it as a national standard. Other selected international standards have also made inroads. The Forest Stewardship Council, set up in China in 2007, had by 2011 certified 2 million hectares of China's forests as sustainably managed, and is issuing new certification to companies using forest products at a rate of one new company every three days.
Practice is of course not always aligned to policy. Rhetorically, it is developing from its early roots in philanthropy and compliance into a strategic concern addressing the efficiency and security of supply chains, development of new products and services, the competition for talent, and the reputation and other gains from credible governance and accountability. And there is no doubt that there are growing numbers of good practice cases. A recent World Economic Forum report, emerging best practices of Chinese globalisers, provides more than a dozen vignettes of responsible business practices of Chinese companies, especially in their international operations. At least 60 major Chinese companies use the international Global Reporting Initiative guidelines, with the state-owned, China Overseas Shipping Company securing the GRI's most stringent "A+" level rating for its sustainability report. The China Entrepreneur's Club, an alliance of CEOs and presidents leading private companies publishes an increasingly robust annual green rating, as do several other groups including the state-sponsored Chinese Academy of Social Science's CSR Unit.
A long way to go
Certainly there is anecdotal evidence of poor, often very poor, social and environmental practice, including amongst self-declared sustainability leaders. Internationally visible cases include most recently the abysmal working conditions in Apple's main supplier, Foxconn, and the ghastly case of Sanlu Dairy, whose chief executive was sentenced to death for knowingly selling tainted milk that killed several children and sickened thousands more. China scores 3.6 out of a best possible score of 10 on Transparency International's Corruption Perceptions Index, wedged between the other BRICS, above India and Russia and below Brazil and South Africa. The Chinese economy is certainly no sustainability paradise by any measure.
Yet equally, there is growing push back against health and safety failures from citizen action. Tens of thousands of students and white-collar workers of the affluent coastal city of Dalian demonstrated last year successfully against the Fujia factory that produces paraxylene, a mildly toxic chemical used in plastics. And while there is arguably less success in rural and working class remonstrations against corporate irresponsibility, this is also likely to change given the increasingly vocal portion of China's 81 million bloggers drawn from a community of 340 million internet users. The Chinese Ministry of Civil Affairs reported that, as of 2008, China had around 400,000 registered NGOs. Unofficial estimates put the figure closer to 3 million. Environmental NGOs are increasingly active in raising public awareness, evidenced by their role in catalysing recent public debate about the health hazards of urban pollution.
Transforming the economy
China's success, indeed very survival, depends on these fragmented developments cohering into a powerful transformation of its economy. State policy will be crucial in driving forward more responsible business behaviour and the greening of investment and global value chains. Civil regulation, the internationally familiar nexus of sustainability standards, citizen action and business engagement, will become increasingly important in delivering credible sustainability outcomes. This will be true internationally as China's burgeoning outward investment seeks legitimacy, access and success. But it will also be true domestically, as the state allows for, and seeks to harness, the forces of civil regulation.
Directionally, there is a vision and a plan. But the challenges of transforming so huge, complex and dynamic a system in real-time makes blueprint-style planning impossible and increasingly unhelpful. Classical approaches to industrial and economic planning are already declining in providing effective policy focus and impact, especially in technologically dynamic spheres of economy. Practical experience is therefore increasingly valued in policy formation. Evidence based, effective practice that can be scaled has growing currency in Chinese policy development and planning. That in turn opens greater opportunities for non-state actors, including international business and non-profit organisations, to have a growing voice in advancing China's policy and practice towards sustainability.
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