csr and the new 2015 environment law in china (abstract) - maverlinn

CSR and environment in China

Confidential, June 4th, 2015EuCham, Shanghai

Speaker - Olivier Coispeau

Resume

• Olivier Coispeau, CFA SFAF

• Founder of Maverlinn Strategic Finance

• Strategy (Roland Berger) and Finance(JP Morgan, Schroders, Clinvest)

• Former economics professor at Paris-Sorbonne university

• Frequently invited guest speaker tointernational finance forums

• Education: Stanford University, ParisDauphine University and Sciences Po Paris

Summary

Disclaimer : This presentation must not be shared with third parties without the written prior consent of Maverlinn. Thispresentation is not fully understandable, complete and reliable without further analyses and oral explanations.

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CSR and environment protection are closely connected

Enforcement will be important to deter irresponsible behaviors

Clearer provisions and additions to the previous law set better framework

Aligns environmental crime definition, risk for polluter and sanctions

The 2014 revision of the China environmental law is a new step forward

Agenda

• China growth : environmental highlights• China previous legal framework for environment protection (summary)• China new legal framework for environment protection (EP)• Corporate goal and common good misalignment, the CSR dilemna• Managing environment in a responsible way

China economy take-off has been named the mostimpressive economic phenomena of the past 30 years

Source : IMF, 2014

Key facts :

• Population : 1.36 Bn people

• Government : CPC, sole governing party

• GDP 2014 : USD 10.13 Tn (+7,1%)

• GDP / Capita : USD 7,448

• Inflation (CPI) : 2.06%

• Trade balance : USD 60 Bn in January 2015

• Forex reserves : USD 4 Tn (est.)

China GDP growth &Investment

47,948

48,148,248,348,448,548,648,748,848,9

49

2009 2010 2011 2012 2013 2014 20150

2

4

6

8

10

12

Investment as % of GDP GDP Growth

Power generation and manufacturing are responsible for theatmospheric pollution as they mostly rely on burning coal

Comments :

• CO2 originates 90% from fossil fuelcombustion, energy efficiency has beenthe major factor for decoupling it to growth

• Main power generation is the mainresponsible for CO2 emissions (49%)

• Manufacturing comes second at 30%, inparticular steel and cement production

• Road transportation represents 7 to8%

• In China, coal combustion is responsiblefor 83% of total emissionsSource : Trends in global CO2 emissions, 2014 EC joint research center, PBL

2013 - CO2 Emissions by sector in ChinaTotal est. 8.2 Billion tons

0 0,5 1 1,5 2 2,5 3 3,5 4 4,5

Other transport

Other building

Residential sector

Other power generation

Road transport

Manufacturing industry

Main power generation

Carbon Dioxide, Billion tons

In this context China is approaching CSR with its owneconomic constraints and cultural background

Comments :

• The EC early defines CSR as: “a concept wherebycompanies integrate social and environmentalconcerns in their business operations and ininteraction with their stakeholders on a voluntarybasis”

• CSR is increasingly important to thecompetitiveness of enterprises and can bringbenefits in: risk management, cost saving, accessto capital, customer relationships, managementand innovation

• CSR can build long term employee, consumer andcitizen trust as a basis for sustainable businessmodel

Source : EC, a renewed EU strategy 2011-2014 for CSR, 25.10.2011

CSR as the« responsibility of enterprises

for their impacts on society »

Emerges as a new definition with theaim of :

• Maximising the creation of sharedvalue for their owners and societyat large

• Identifying, preventing andpreventing their possible adverseimpacts

The new environmental law is a new step to better protectChina natural assets and the well being of future generations

Agenda


Constitution of the People Republic of China (from Fifthsession of the Fifth NPC, Dec. 4th,1982)

• Art 9. [ … ]

The State ensures the rational use of natural resources and protects rare animals andplants. Appropriation or damaging of natural resources by any organization or individualby whatever means is prohibited

• Art 12. [ … ]

The State protects socialist public property. Appropriation or damaging of State orcollective property by any organization or individual by whatever means is prohibited.[ … ]

• Art 26.

The State protects and improves the environment in which people live and theecological environment. It prevents and controls pollution and other public hazards. TheState organizes and encourages afforestation and the protection of forests.

The highest level of State is directly involved inenvironmental protection and resources conservation

NPC

State Council

Creates global China international image on environmental protection andresources conservation

LPC

NGO

People

Media

SOEs

WOFEs JVs

Others

The enforcement process between regulations and the realeconomy is well structured et detailed

Very impressive capacities to address environmental issues

• Legislation (national, local)

• Administrative decrees

• International conventions

• FYP deals withenvironment since 6th

• Defines targets

• Set priorities andbroad goals

• Discharge pollution permits(tested in 1991)

• Taxes, fines

• Subsidies

• Warning letters

• Fines, pollution charges (60%)

• Permit withdrawal (total/partial)

• Plus civil and criminal charges

FYP ActionLegal

Inspection ImpactLaws, decrees

The problem is that this rather complex organization isdelicate to manage

Comments :

• There are conflicts of interest between thevarious levels and agencies involved, not tomention SOEs

• Environmental governance is complex, manyadministrative overlaps and high managementcost

• Goals and priorities of the different agenciesoften diverge

• Political leaders are often evaluated on the basisof GDP growth, not environmental compliance

• For example, when EPB enforces severepenalties, local governments may mitigate themon the basis of employment or tax collection

Multiplicity

Multiplicity

Complexity

Complexity

Priorities

Agenda


The objective of the new law is to address a number ofdifficulties identified and declare « war against pollution »

Source : AFD

1. The rules are not precise enough, and subject tovarious interpretationKey terms are not always well defined

2. Lack of detailed implementing rulesApproved in April 24, 2014 after 4 reviews with effect on January 1st, 2015

3. Lack of detailed enforcement proceduresassociated with specific areasEPL (1989) states general rules but has no clear provisions for legal liabilities

4. Focus on administrative liability, civil and criminalliabilities were not completely definedHowever this is a highly complex piece of legislative work, creating lots ofpressure

5. Weak fines on polluters, low collection rateSome prefer to pay a rather low fine rather than change their production process

Despite thepreviously describedefforts, this situationcalled for a revisionof the existing legalframework

The new law (2014)The old EPL (1989)

This new EPL raises significantly the potential liability for no compliance

The 2014 EPL revision has been hailed as a radicalchange in regulation, 25 years after the original EPL

• 70 articles and 7 chapters Chapter titles have been kept but

most of the content has beenrewritten

• New chapter added Public disclosure and public

participation

• Three major changes New chapter 5: enhanced role of

civil society in EP Regulatory specificity and details Pervasiveness of governance

• 47 articles and 6 chapters Then very limited environmental

regulation until this time

• “3 synchronicities” Design, construction, operation of

pollution control equipment

• Key features of the orginal EPL Quite broad and generic Polluting fees Requirement for environmental impact

assessment

Source : Swiss Re, Center for global dialogue

The new EPL is a backbone which is going to be filled withmore precise obligations and interpretation

Comments :

• MEP and government entities have began toissue guidance for the implementation of therevised EPL

• Over a dozen field project under way to assist inthe implementation of the new law (draft)

• Regulatory actions putting flesh on the keybarebones of the new EPL

• Supreme People’s Court have been adding anumber of very detailed principles e.g.precaution principles, guiding cases, clarifications(penalties for NGOs seeking to make EP profit)

• State Council Legislative Office issued notice totighten environmental compliance

EPL 1989

EPL 2014

SPC SCLO

Guidance

Cases

Notice

Agenda


When it comes to environment, we may all wonder what isreally at stake …

“Chinese people used to feel a sense of pridefor being the world’s factory. Now, everyonerealizes what it costs to be that factory. Ourwater has become undrinkable, our foodinedible, our milk poisonous, and worst of all,the air in our cities is so polluted that weoften cannot see the sun.”

Jack MaHarvard Business Review

November 2013

We have no replacement planet …

“China’s reform has entered a deep waterzone, where problems crying to beresolved are all difficult ones. What we needis the courage to move the reform forward. Touse a Chinese saying, we must “get ready togo into the mountain, being fully aware thatthere may be tigers to encounter.”

Xi JinpingCollege of Europe

Bruges, April 1 2014

Photo : NASA

Senior management traditional responsibility has been tofocus on growing the top line and the firm profitability

Comments :

• Shareholders want more value andhigher stock market price

• Customers want better and cheaperproducts and service

• Workers want better working conditionsand better pay

• Regulator wants corporates not onlyrespect the law, pay taxes, create jobsbut also contribute to public good

• Senior managers want to be recognizedas great leaders capable to deliver

SeniorManagement

Shareholders

Market

Customers

CompetitionWorkers

Jobs

Accountability Performance

State wants GDP andcommon good

Management pressure

The respect of common good and the corporate interestdoes not necessarily align when it comes to best practices

Comments :

• When polluting is at “no cost”, there islittle incentive to behave as a goodcitizen

• Economics provide plenty of excusebased on competitiveness

• This means that the perception is thatmarket only discriminates on price

• It also assumes that the common goodis free therefore polluting is beneficial

• The social conscience of marketplayers cannot be take for granted

+Reward

Risk +

Acceptable risk thresholdR1

R2Catastrophic risk threshold

Pollution Risk - Reward

-Sanction

Agenda


• What are the resources provided by Chinarich history and traditions to define themodus operandi of corporations consciousof their social responsibility

• What are the urgent priorities that must beaddressed by companies

• How to emulate a responsible knowledgenetwork between government agencies,corporations, civic groups and communitiesto share experience: success, setbacks,worries and methodologies

• Help parties involved in CSR build a reliabletoolbox to weight the decision they need tomake as responsible citizens

Maverlinn’s CSR in China initiative is an example of what canbe done to raise awareness on responsibility

Background

• Practical issues differ very much from onenational context to another

• The very size of China and its impact onthe world economy make this issue morepressing than others

• The quest for a more qualitative growth asexpressed by the 12th FYP emphasizedthe need for adjusting policies

Fram

ewor

k

Assessment Vision Blueprint

Comments :

• Based on a 3 year research programmeled by Maverlinn and its team andauthored by Pr. Benoit Vermander. It wasfirst published in English, then in Chinese

• It was supported by industry leaders whonot only provided support but also keyinsights for the research

• Aside explaining what can be CSR in aChinese context, the research focuses onidentifying key soft operational successfactors for the development of the Chinaeconomy

• The research initially set for aninternational audience also received awarm welcome from Chinese firms

Our CSR in China initiative is an example of what can bedone to raise awareness on responsibility

Key takes

• The new 2014 EPL is raising the bar in termsof environmental compliance, much heaviersanctions will be applied to polluters

• Being environmentaly responsible is a greatway to pracice CSR, and show bothpatriotism and respect for the world we share

• If nothing is done, the impact on our dailylives is likely to be catastrophic

• It is everybody’s responsibility to identify, andimplement short practical « mini bangs » tofoster a much larger eco-conscience for abetter life together

Leading a world of change, together

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csr and the new 2015 environment law in china (abstract) - maverlinn

Economy & Finance