Managing Environmental Risks

Most FIEs take the view that although some Chinese companies may be able to push the envelope as far as environmental compliance goes, complying with the law in this area is generally best. China’s getting more serious about environmental compliance all the time. Even minor malfeasance can result in enormous potential liability for your company.

Surveying environmental crime and punishment

China doles out several types of punishment for violating environmental standards:

✓	Jail: If your company does something extremely egregious to the environment, your legal representative and other senior managers can go to jail. This result is rare.
✓	Curtailing or halting operations: The authorities can order your company to curb production or shut down, usually temporarily.
✓	Inability to expand: When a company gets to a point where its site can’t hold any more contaminants by law, it may not be allowed to expand the business.
✓	Fines: Fines are common. They don’t usually exceed 100,000 RMB.
✓	Cleaning up: Your company may have to remediate your site if it uses up its pollution quota. Also, China’s law is moving toward U.S.-style liability, in which a company can be liable for pre-existing pollution on a site.
✓	Bad publicity: Some cities, such as Shanghai, are putting environmental offenders’ names on the Internet. If you look at these sites, you may be surprised to see the names of a number of multinationals. This penalty creates the risk of damaging your reputation — particularly if your company is large and well known.

In addition to pollution limitations that the law imposes, the authorities measure your company’s pollution against the estimates contained in the Environmental Impact Assessment (EIA), which you have to complete as part of the application process for most manufacturing businesses (see Chapter 13 for details). In addition to being a prerequisite for construction, the EIA is important because it’s your company’s commitment on pollution levels. If the pollution exceeds the amounts in the EIA, the authorities may prohibit expansion and/or require your company to somehow fix the situation.

Practicing more than good intentions

FIEs can easily end up violating environmental standards unintentionally. Generally, FIEs focus more on worker safety. Although worker safety is quite important, don’t take your eyes off environmental issues. Here are the three areas where FIEs commonly have to watch out:

✓	Hazardous waste management
✓	Wastewater treatment
✓	Chemical management

Flushing money down the toilet — and into the water table Even a small gap in training can have multimillion-dollar consequences for your company. Dr. Yong Wang heads Environmental Resources Management (ERM, www.erm.com), one of the world’s leading environmental consulting firms, in China. ERM has a number of clients in China that engage it to periodically assess how they’re impacting the environment. Yong tells the story of an FIE’s routine environmental audit that uncovered a big problem — trichloroethylene (TCE), an odorless, colorless solvent, in the water table. The concentration exceeded standards by 2,000 times. When ERM investigated, it traced the cause of the pollution to a single incident. One of the factory workers had disposed of two liters (a medium-sized soda bottle’s worth) of TCE by flushing it down the toilet. That single flush led to the company’s reserving several million dollars to clean up the TCE!

Be especially careful with hazardous waste management. First, you need to implement proper segregation, transportation, and storage procedures. China doesn’t have many licensed and qualified hazardous waste disposal companies. If your disposal company doesn’t do its job properly, your company may have to pay to remediate the disposal company’s land! Know whom you’re dealing with for waste disposal.

FIEs can easily have problems from employee mishandling of pollutants and chemicals. Unless you thoroughly train employees, don’t expect them to know how to properly store and dispose of substances. As the nearby sidebar illustrates, even a small mistake can create a huge problem.

Getting help

Monitoring your impact on the environment and staying in line with the law is a lot of work. This section discusses when to get some help and how much the bills may run.

Purchasing land

To guard against environmental offenses, you need to understand the state of the land before you purchase it. You almost certainly want to conduct a Phase I investigation of your planned site. Environmental consulting firms such as Environmental Resources Management (ERM) do site investigations. This step can tell you whether the land has any pre-existing environmental conditions that can affect your business. For a 10,000 m² parcel, this investigation usually costs around US$5,000.

Completing the Environmental Impact Assessment

By law, you need a licensed company to perform the Environmental Impact Assessment (EIA). The EIA can vary a lot in time and complexity. After submitting the EIA, the consultant has to answer questions and concerns from a locally convened panel of experts. Depending on the level of comments, the EIA may need significant revisions. In 2006, the State Environmental Protection Agency rejected 30 percent of initial EIAs.

Many companies don’t account for the potentially significant costs and delays involved in the EIA process. Make sure your planning factors in possible issues here. The time to prepare and receive approval for the EIA can vary from one month to one year, at a cost of roughly US$5,000 to US$50,000.

Maintaining pollution controls and legal compliance

Especially if you’re opening your first factory in China, you need help from an experienced environmental consulting firm to design proper pollution controls and training programs. Conducting periodic audits to benchmark progress is also a good idea. You need to monitor how your usage affects pollution concentration. Audits generally cost US$5,000 to US$10,000.

You should ensure that your consultant keeps you up-to-date on changes in environmental laws and regulations that affect you. As in many areas of Chinese law, environmental regulations change rapidly. The direction of change is definitely toward strictness.