Intensifying nationwide environmental enforcement is affecting foreign company supply chain management, compliance, and reporting procedures in China. New rounds of environmental inspections have already led to increased supply chain disruption and, in some cases, factory shutdowns for months. This pervasive nationwide trend has important implications for companies as they approach environmental compliance.
Beginning in 2015 with the passing of the Environmental Protection Law, China’s Ministry of Environmental Protection (MEP) has grown more outspoken about the consequences of poor or non-compliance with environmental standards. MEP has followed these warnings with actions that demonstrate the seriousness of this movement, increasing the frequency, scope, and oversight of punishments.
Once only demanding a one-off payment for violations, China now requires companies to pay a compounding daily fine until the violation has been corrected. MEP has also extended compliance oversight to environmental NGOs, which are permitted to take legal action against violating companies, including major multinationals.
This fall, China began conducting the final round of a four-round inspection effort launched in July 2016 and has significantly heightened government oversight. The fourth round, which began this fall, covers all of China’s 31 mainland provincial level regions. According to MEP figures, inspections from January to August 2017 led to the punishment of roughly 18,000 companies, with fines reaching $132.2 million, as well as the discipline of 12,000 officials. Under increased pressure to prioritize environmental enforcement, some local governments have even ordered factories to shut down prior to inspections for fear of receiving failing grades. This trend has only created further uncertainty for domestic and foreign companies as they seek to adhere to standards and avoid friction with local officials that could lead to unnecessary factory closures, supply chain disruption, or even factory displacement.
Certain reports suggest that China’s enforcement campaign has caused officials to become excessive in their application. In some areas, inspectors are forcing companies to close on the basis of violations that are not related to pollution, such as expired business licenses, in order to give the appearance of stricter environmental oversight. Such actions have been at the expense of local economies, as officials race to reduce pollution to only three-fourths of 2012 levels by the end of 2017. Local officials have shown eagerness in their approach in part due to a belief that improved environmental enforcement will serve as a boon for domestic companies as they seek to offset the dominance of foreign brands across industries.
China’s tightening enforcement will also affect reporting structures for environmental authorities throughout the country. There are currently new pilot reforms requiring local governments to report to Beijing. These reforms, in place to significantly reduce leeway for officials to offer pardons to violating companies, have already been seen in local operations. Although such changes to the reporting structure increase risks of local extortion, initial accounts suggest that local officials have been very cooperative.